Shlomo Yanai, Teva's President and Chief Executive Officer, commented, "This was another solid quarter for Teva. Our strong financial results were driven by our product launches in the U.S., robust sales in the fast-growing international markets, and Copaxone®'s continued leadership of the global MS market."
Mr. Yanai continued, "These are exciting times for Teva. Last month we announced very promising results of a study which demonstrated Azilect®'s efficacy in slowing the progression of Parkinson's disease, one of the most critical unmet needs of Parkinson's patients. And of course just over a week ago we signed an agreement to acquire Barr Pharmaceuticals, a deal that will dramatically increase the scale and scope of Teva's leadership, allow us to exceed our strategic targets, and create great value for all of our stakeholders."
Exchange rate differences resulting primarily from the decline in the value of the U.S. dollar relative to certain other currencies (primarily European currencies, the Canadian dollar and the Israeli shekel) contributed approximately 6 percent to the second quarter of 2008 sales. Foreign currencies had a 1.8 percent adverse affect on operating income.
Pharmaceutical sales in North America (including Copaxone®) for the second quarter reached $1,505 million, accounting for 56 percent of pharmaceutical sales and representing an increase of 12 percent compared with the second quarter last year. Quarterly sales benefited primarily from the launches of generic Wellbutrin XL® (Bupropion Hydrochloride Extended-Release Tablets, 150 mg) and Risperdal® (Risperidone) during the quarter, as well as sales of other generic products launched in the previous two quarters, coupled both with strong sales of Copaxone® and the fact that Teva now records 100 percent of the sales of Copaxone® in North America.
As of July 23, 2008, Teva had 149 product applications awaiting final FDA approval, including 41 tentative approvals. Collectively, the brand products covered by these applications had annual U.S. sales of approximately $93 billion. Of these applications, 88 were "Paragraph IV" applications challenging patents of branded products. Teva believes it is the first to file on 50 of the 88 applications, relating to products with annual U.S. sales exceeding $39 billion.
Pharmaceutical sales in Europe (including Copaxone®) in the second quarter of 2008 totaled $762 million, accounting for 29 percent of pharmaceutical sales and up 25 percent compared to the second quarter of 2007. The increase in sales was attributable to strong generic sales in France, Hungary, Poland and the Czech Republic, and increased sales of Copaxone® and Azilect®, as well as the weakening of the US dollar against the European currencies.
Since the beginning of 2008, Teva received in Europe 512 generic approvals relating to 90 compounds in 173 formulations, including 1 EMEA approval which applies to all EU member states. In addition, as of June 30, 2008, Teva had approximately 3,156 marketing authorization applications pending approval in 30 European countries, relating to 220 compounds in 454 formulations, including 3 pending applications with the EMEA.
International pharmaceutical sales (including Copaxone®) in the second quarter of 2008 totaled $400 million, accounting for 15 percent of pharmaceutical sales and representing an increase of 37 percent compared to the second quarter of 2007. Growth was driven by sales in Russia as well as across Latin America. Approximately 7 percent of Teva's total pharmaceutical sales were generated in Latin America (46 percent of international pharmaceutical sales), while Israel contributed 4 percent of total pharmaceutical sales (29 percent of international pharmaceutical sales) and the CEE contributed 2 percent of total pharmaceutical sales (16 percent of international pharmaceutical sales).
Global in-market sales of Copaxone® reached a record of $563 million in the second quarter of 2008, an increase of 29 percent over the second quarter of 2007. In the U.S., in-market sales increased by 17 percent to reach $332 million, while in-market sales outside the U.S. increased by 53 percent to $231 million. Copaxone® maintains its status as the leading global multiple sclerosis treatment in the second quarter of 2008.
On March 31, 2008, the Copaxone® distribution agreement for North America with sanofi-aventis ended. As a result, Teva now records the full in-market sales of Copaxone® in North America and, for a two year period will pay sanofi-aventis a payment equal to 25 percent of net sales, which is recorded as part of SG&A. In addition to this payment, sanofi-aventis also ceased to participate in Teva's Copaxone® sales and marketing expenses in North America that were recorded against SG&A in previous quarters. This change has a positive contribution to Teva's net sales, gross profit and gross profit margin. The increase in net sales is offset by the increase in SG&A expenses, resulting in a negative negligible effect on operating income.
Global in-market sales of Azilect® reached $42 million in the quarter, a 50 percent increase over the comparable period in 2007. On June 16, 2008, Teva announced top line results from ADAGIO, the phase III study designed to demonstrate that AZILECT® 1 mg tablets can slow the progression of Parkinson's disease. In the trial, the currently marketed AZILECT® 1 mg tablets met all three primary end points with statistical significance, and as such, may be the first Parkinson's disease treatment to slow the progression of the disease.
Teva's global respiratory business recorded $168 million in sales in the second quarter of 2008, down 7 percent compared to the second quarter of 2007, but flat compared to the first quarter of 2008. Respiratory sales, primarily in the U.S., were affected by continued strong sales of CFC propellant-based products, as pharmacies use up the remaining stocks of CFC prior to the January 1, 2009 deadline, while the split between CFC and HFA products remained stable since the third quarter of 2007. During this period, Teva maintained its overall market leadership with approximately 56 percent of the HFA market, which constitutes approximately 60 percent of the SABA market in the U.S.
API sales to third parties in the second quarter increased 9 percent, totaling $156 million. Internal sales to Teva's pharmaceutical business increased 55 percent, compared to the comparable quarter last year, resulting in total API sales this quarter of $452 million, an increase of 35 percent compared to the second quarter of 2007. Internal API sales continued to benefit from Teva's generic launches in the U.S.
Gross profit margin reached 53.3 percent in the second quarter of 2008, compared to the 52.1 percent gross profit margin recorded in the second quarter of 2007. As indicated above, starting this quarter, the Company's gross profit margin will be positively affected by the termination of the distribution agreement with sanofi-aventis in North America as of March 31, 2008.
Net Research & Development expenditures totaled $198 million, or 7 percent of sales, compared to 5.7 percent of sales recorded in the second quarter of 2007. This higher spending rate is in accordance with the Company's strategic plan to double R&D output over the next five years. As previously indicated, R&D spending is expected to reach a run rate of 7.5 percent of sales by the end of 2008.
Selling, General and Administrative (SG&A) expenditures totaled $669 million, or 24 percent of sales, for the second quarter, compared to $469 million, or 20 percent of sales in the comparable quarter of 2007. As indicated above, the increase SG&A resulted primarily from the termination of the agreement with sanofi-aventis in North America as of the March 31, 2008.
The tax provided for in the second quarter was $68 million (or 11 percent of pre-tax income). This adjusts our cumulative tax provision to our current estimate of the annual tax rate for 2008 which is 13 percent of pre-tax adjusted income. This rate compares to a rate of 18 percent for the second quarter of 2007 and 17 percent of pre-tax income for the whole of 2007. The reduction in the effective tax rate in 2008, compared to 2007, is due to a different product mix and higher vertically integrated product sales in 2008.
Cash flow generated from operating activities during the second quarter of 2008 was a record $806 million. Free cash flow reached $568 million, excluding net capital expenditures (of $132 million) and dividends (of $106 million). Approximately $540 million was used to reduce debt obligations $141 million in redemption of convertible debentures which matured during the quarter and $399 million in reduction of long-term and short-term debt. Cash and marketable securities remained unchanged as of June 30, 2008, totaling $3.6 billion.
During this quarter, the auction rate securities held by the Company were further adjusted down by $60 million to a total net amount of $274 million as of June 30, 2008. Of this amount, $25 million were charged to the income statement, and the balance increased the provision of "other comprehensive income" in the balance sheet.
Shareholders equity on June 30, 2008 reached $15.1 billion, up $679 million from March 31, 2008. Approximately 22 percent of the increase in shareholders equity in the quarter reflects a positive foreign currency effect.
For the second quarter of 2008, the share count for the fully diluted earnings per share calculation was 836 million shares. As of June 30, 2008, Teva's share count for the fully diluted share count calculation is estimated at 836 million shares.
Teva Pharmaceutical Industries Ltd., headquartered in Israel, is among the top 20 pharmaceutical companies in the world and is the world's leading generic pharmaceutical company. The Company develops, manufactures and markets generic and innovative human pharmaceuticals and active pharmaceutical ingredients, as well as animal health pharmaceutical products. Over 80 percent of Teva's sales are in North America and Europe. For further information, visit http://www.tevapharm.com.