Teva Pharmaceutical Industries (TEVA)

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Teva Pharmaceutical Industries (TEVA) is the world’s largest producer of generic drugs by revenue. ^[1] With 36 manufacturing facilities across the globe, Teva's scale-- 4 to 6 times that of competitors Barr, Mylan and Watson Pharmaceuticals-- allowed it produce its drugs more cheaply and consequently price its drugs lower. In 2006 and 2007, Barr Pharmaceuticals (BRL) and Mylan Laboratories (MYL) made acquisitions which significantly increased their manufacturing capacity while giving both companies greater access to international markets previously dominated by Teva. Although TEVA, is still the largest manufacture of generic drugs, it will face significantly more competition beginning in 2008.

In 2007, Teva filed more patent challenges than any other generic pharmaceutical company. Rather than waiting for patents to expire, Teva files challenges which, when successful, allow it to produce the "challenged" drug for 180 days without other generic competition. This strategy, however, comes with the risk of increased exposure to lawsuits by the brand manufacturers. In 2005 for instance, TEVA was forced to stop selling it generic version of the cancer drug Protonix after Wyeth alleged that the company had committed patent infringement.

[edit] Business Financials

Based in Israel, the Teva has locations worldwide and employs over 25,000 people. Its products range over all the major therapeutic areas including anti-infective, cardiovascular, oncology, dermatological and anti-inflammatory. Teva USA, the largest domestic subsidiary of the international corporation, markets over 300 generic products, the largest pipeline of any generic manufacturer. Teva’s most significant products in 2006 were the generic versions of, Zocor (simvastatin), Zoloft (sertraline), Wellbutrin XL (bupropion) and Pravachol (pravastatin). These generics were all produced under 180 days of exclusivity, meaning that Teva reaped very large sales as a result. Teva currently has 162 product registrations awaiting approval from the Food and Drug Administration, with 45 potential candidates for exclusivity. Such high numbers, if approved, could mean huge sales for the giant ^[2].

The spikes in Teva’s financials, and the reasons that income has not drastically increased as a result of a 60% increase in sales, is that in both 2004 and 2006, Teva made major acquisitions, in 2006 for over $1 Billion. This showcases Teva’s dedication not necessarily to immediate profits but rather to long-term growth and strength in the generic market.

Teva Annual Report^[3]

[edit] Key Trends and Forces

• Teva loses ground as others grow: Until the end of 2007, Teva was a monolith in the generic drugs (Small Molecule) industry. With the largest sales by volume, the largest number of products and dosages, the most patent challenges, etc. only Novartis AG (NVS) generic subsidiary Sandoz had manufacturing potential anywhere close to Teva's. This, however, has been changing. Mylan's and Barr's acquisitions of other generics between 2006 and 2007 have made them into major players. Specifically, between 2006 and 2007 Mylan acquired Merck's generic business in Europe and Matrix, a generic producer based in India. While they are still small compared to Teva, these companies are beginning to expand their product lines, manufacturing capabilities, and geographical reach, and these combined forces are digging into Teva's market share. This is particularly noticeable in Mylan's case. Since its acquisition of Merck's generic business at the end of 2006, Mylan's international sales jumped from $5 billion to $75 billion.^[4] These companies are thus able to compete for the first time in the international arena with Teva.

• Gaining exclusive rights to a generic through patent challenges: Generic drugs are equivalents of brand name products, and they can be made under two conditions. When a patent on a drug expires, other companies can then produce that drug. Alternatively, a generic company can challenge a brand name drug and claim that parts of it should not be protected under patent. When this occurs and the generic manufacturer wins the challenge, it gets 180 days of exclusivity in which only it can produce the drug. Teva in 2006 gained the 180 day exclusivity on several major generic versions of Zocor (simvastatin), Zoloft (sertraline), Wellbutrin XL (bupropion) and Pravachol (pravastatin).^[5] Pharmaceutical patents are generally short, and the process for gaining FDA Approval for a generic drug is much less rigorous than for a new medication. Often, generic manufacturers only have to prove that their product is equivalent; they do not have to go through the lengthy and expensive process of clinical trials. Thus, many generic manufacturers will wait for the patents to expire.

  Teva is more dependent on patent challenges than other generic manufaturers. In recent years, manufactures have begun fighting patent challenges by licensing their drugs to a single generic, making the 180 day exclusivity period less meaningful for patent challengers. If exclusivity is slowly eliminated by brand manufacturer manipulation, Teva will be more affected than some of its smaller competitors.

• Large buyers have less leverage over TEVA: Retail chains, large distributors, etc. buy in bulk, and this allows them to negotiate lower prices. Wal-Mart for instance offers $4 prescriptions; because the company has the power to negotiate prices on huge quantities, it can offer consumers lower prices. While such pricing pressure is a major concern for smaller firms, Teva is in a unique position because of its size. Teva’s larger size, however, allows it resist much of the pricing pressure that effects other companies. There are two reasons for this. First, its economies of scale allow Teva to produce at low cost, and so it can absorb extra pennies that its competition simply cannot. Secondly, because Teva holds such a large share of the supply of drugs, it can more effectively bargain.

  Medicare Medicare is the government's health subsidy plan. Over the past few years, both states and the federal government have begun suing pharmaceutical companies, including generic manufacturers such as Teva, because of alleged price fraud. The states are suing based on alleged defrauding of the state health care assistance programs, Medicaid. If the states win, the pharmaceutical companies will be forced to pay hundreds of millions of dollars and change pricing schemes. While the first trial will not be finished for at least another year, Teva is named in some of the lawsuits as a defendant and as the largest generics company probably stands to lose the most.

• Legal challenges halt product sales: Teva faces law suits from brand manufacturers. Brand companies can file a suit claiming patent infringement in order to stop generic production temporarily, even if there were not necessarily infringement.^[6] This delaying tactic can be very costly, both in legal terms and in terms of lost production time. experienced this with a challenge from Wyeth (WYE) over Teva's generic version of its cancer drug Protonix. Teva agreed to stop production of the $2.5 billion selling generic while litigation commences. Teva is involved in several other legal proceedings, and in 2006 reached major settlements with brand companies claiming patent infringement, including with Purdue over OxyCotin.

[edit] Competition

While Teva is used to dominating the generic industry with its size, it has seen an increase in competition over the past few years. The growth through acquisition of Mylan and Barr Pharmaceuticals (BRL) have begun posing a challenges to the company. Teva has relied on its size to maintain very low costs which allows it to price below its competitors, but their growth undermines this ability.

Over 12% of Teva’s sales come from innovative products such as Copaxone, and so it faces challenges including (ironically) generic competition from other companies on this drug.

Company Annual Reports^[7]

Company Annual Reports^[8]

Teva faces competition both from generic and brand name drug producers. Some of its top competitors include:

• Mylan Laboratories (MYL) is the third largest generic producer in the US. Mylan also owns subsidiaries that produce proprietary drugs and hospital packages.
• Barr Pharmaceuticals (BRL): is a split generic/brand manufacturer with about 75% of its sales in generics. Its main product line is contraceptives, and it is dominant in this market.
• Sandoz, a generic division of Novartis AG (NVS). Sandoz's major therapeutic areas include antibiotics, preparations for treating the central nervous system, cardiovascular, hormones and antiallergics.
• Dr. Reddy's Laboratories (RDY) is one of the largest generic manufactures in the US by revenue. It also manufactures branded products. Dr. Reddy's products include those for hypertension, allergies, urological disorders, cardiovascular, and antibiotics.

[edit] References

1. ↑ Teva 2006 20-F pg. 11
2. ↑ Teva 2006 20-F pg. 11
3. ↑ Teva 2006 20-F pg. 2
4. ↑ Mylan 2007 10-K, pg. 73
5. ↑ Teva 2006 20-F, pg. 40
6. ↑ Teva 2006 20-F pg. 5
7. ↑ Watson 2007 10-K pg. 38, Mylan 2007 10-K pg. 31, Teva 2007 20-F pg. 3, Barr 2007 10-K pg. 45, Novartis 2007 20-F pg. 90
8. ↑ Mylan 2007 10-K, Teva 2007 20-F, Novartis 2007 20-F