Case Review: Teva Pharmaceutical Industries

Key questions for today: Can Teva compete on price and low-cost at the same time it develops innovative drugs? What should the company focus on: Consolidate the U.S. and other substitution-oriented generics markets Further expand into the global branded generics markets Turn itself into a more specialized generics or even an innovative firm How can it manage such diverse goals under one roof?

Can Teva compete on price and low-cost at the same time it develops innovative drugs?

What should the company focus on:

Consolidate the U.S. and other substitution-oriented generics markets

Further expand into the global branded generics markets

Turn itself into a more specialized generics or even an innovative firm

How can it manage such diverse goals under one roof?

What drives Teva? … become one of the world's leading pharmaceutical companies, by being the undisputed leader in the global generics industry and by developing a global franchise in selected innovative products originating from Israeli science. Teva website, “Our Vision”

Teva has a strong tradition and history.

Teva built its advantage by making choices different from its competitors. R&D and Innovation Limited direct investment in R&D, but strategic partnerships yield 150 to 180 proposals per year but also reduce cost of drug development by 40-60% Primary vehicles are strategic R&D partnerships and equity stakes in startups Spreads centers of excellence around globe to protect intellectual property of production processes Values Fiscally conservative with aggressive low cost culture Track record of successful acquisition integration Prizes fair treatment of employees which results in low turnover Ready to make multi-billion dollar acquisitions if appropriate Founding values are self-sufficiency, performance and manufacturing

Limited direct investment in R&D, but strategic partnerships yield 150 to 180 proposals per year but also reduce cost of drug development by 40-60%

Primary vehicles are strategic R&D partnerships and equity stakes in startups

Spreads centers of excellence around globe to protect intellectual property of production processes

Fiscally conservative with aggressive low cost culture

Track record of successful acquisition integration

Prizes fair treatment of employees which results in low turnover

Ready to make multi-billion dollar acquisitions if appropriate

Founding values are self-sufficiency, performance and manufacturing

Teva has focused its generic production efforts on cost efficiency, speed, availability and reduced inventory. Operations Centers of excellence to leverage local labor skills and costs Strong inventory levels to improve replenishment Backward integration into active ingredients which it can source at larger scale and lower cost Investing in supply chain management and distribution Constant assessment of operational effectiveness and efficiency Cross functional teams in factories focus on continuous improvement Greater scale benefits than competitors even with redundancies in supply chain to protect against disasters and disruptions Ongoing reconfigurations of supply chain as growth and acquisitions continue

Centers of excellence to leverage local labor skills and costs

Strong inventory levels to improve replenishment

Backward integration into active ingredients which it can source at larger scale and lower cost

Investing in supply chain management and distribution

Constant assessment of operational effectiveness and efficiency

Cross functional teams in factories focus on continuous improvement

Greater scale benefits than competitors even with redundancies in supply chain to protect against disasters and disruptions

Ongoing reconfigurations of supply chain as growth and acquisitions continue

Teva built its advantage by making choices different from its competitors. Product Scope Low cost and high volume commodity generics US 180-day exclusive generics Niche products and biosimilars Branded pharma Regulatory Rigorous execution demonstrated through faster ANDA applications and resulting larger number of approvals Geographic Scope Strong international presence Marketing Limited need or interest in brand advertising or marketing Sales and Channels Concentration on national chains who purchase without wholesalers Added services of inventory management as well as volume-based discounts and pricing bundles Low price guarantee and credits provided in order to maintain share Limited direct sales force and detailing skills

Low cost and high volume commodity generics

US 180-day exclusive generics

Niche products and biosimilars

Branded pharma

Rigorous execution demonstrated through faster ANDA applications and resulting larger number of approvals

Strong international presence

Limited need or interest in brand advertising or marketing

Concentration on national chains who purchase without wholesalers

Added services of inventory management as well as volume-based discounts and pricing bundles

Low price guarantee and credits provided in order to maintain share

Limited direct sales force and detailing skills

What are the most important environmental factors affecting the pharmaceutical industry and what are their likely impacts? Category Factors Importance/Impact Economic Technological Political-Legal Sociocultural: Demographic Sociocultural: Cultural

The Five Forces Model tell us that pharmaceutical industry is moderate to highly competitive. Threat of entry in the branded drug part of the business is relatively low, but much easier with generics. Few new branded firms can afford to start up Biotech is changing the timeline, the availability of information, and the investment required to bring a product to market. Limitations come from many factors including: Access to distribution via health care formularies, Deep R&D capabilities and investments Intellectual property, with new moves to obtain patents on component chemicals, manufacturing methods and reformulations as way to preserve protection Extensive capital reserves to support the long and often uncertain drug development process Knowledge of the regulatory and drug approval process.

Threat of entry in the branded drug part of the business is relatively low, but much easier with generics.

Few new branded firms can afford to start up

Biotech is changing the timeline, the availability of information, and the investment required to bring a product to market.

Limitations come from many factors including:

Access to distribution via health care formularies,

Deep R&D capabilities and investments

Intellectual property, with new moves to obtain patents on component chemicals, manufacturing methods and reformulations as way to preserve protection

Extensive capital reserves to support the long and often uncertain drug development process

Knowledge of the regulatory and drug approval process.

The Five Forces Model tell us that pharmaceutical industry is moderate to highly competitive. End consumers/patients have moderate power but often rely on referrals from doctors and pharmacists. Persistent and increasing consumer advertising is giving customers more information to influence a doctor’s prescription of a branded pharmaceutical. This is somewhat blunted by the impact of health care costs and formularies push to use generics. Strong brands supported by major advertising generate blockbuster drugs that are critical to getting consumers in the door – particularly for “lifestyle” drugs.

End consumers/patients have moderate power but often rely on referrals from doctors and pharmacists.

Persistent and increasing consumer advertising is giving customers more information to influence a doctor’s prescription of a branded pharmaceutical.

This is somewhat blunted by the impact of health care costs and formularies push to use generics.

Strong brands supported by major advertising generate blockbuster drugs that are critical to getting consumers in the door – particularly for “lifestyle” drugs.

The Five Forces Model tell us that pharmaceutical industry is moderate to highly competitive. Indirect customers such as medical professionals and insurance companies have great deal of power . Substitutes often exist for most conditions, but personalized medicine could begin to result in specific identification to a person. Doctors are increasingly concerned about independence from pharmaceutical sales efforts, but could still have some company preferences which mitigate power. Insurance firms balance efficacy and costs, leaning to generics wherever possible. Large direct purchasing customers have enormous purchasing power due to volumes. Increasing attention to universal health care or state/federal programs will increase pressure on pharmaceutical firms to rationalize prices. National chains doing more direct contracting without wholesalers

Indirect customers such as medical professionals and insurance companies have great deal of power .

Substitutes often exist for most conditions, but personalized medicine could begin to result in specific identification to a person.

Doctors are increasingly concerned about independence from pharmaceutical sales efforts, but could still have some company preferences which mitigate power.

Insurance firms balance efficacy and costs, leaning to generics wherever possible.

Large direct purchasing customers have enormous purchasing power due to volumes.

Increasing attention to universal health care or state/federal programs will increase pressure on pharmaceutical firms to rationalize prices.

National chains doing more direct contracting without wholesalers

The Five Forces Model tell us that pharmaceutical industry is moderate to highly competitive. Threat of suppliers relatively low. Most chemical inputs are commodities and multiple production options exist. Incorporating biotech techniques and processes into drug development and launch could increase power of suppliers where those services are outsourced or contracted.

Threat of suppliers relatively low.

Most chemical inputs are commodities and multiple production options exist.

Incorporating biotech techniques and processes into drug development and launch could increase power of suppliers where those services are outsourced or contracted.

The Five Forces Model tell us that pharmaceutical industry is moderate to highly competitive. Rivalry is medium-fierce Industry profitability is still relatively high Emerging market competitors increasing pressure in generics Growth is slowing except in emerging markets where price pressure exists Brand spending ion blockbuster drugs is high Patent protection provides some immunity from competition, but firms are pulling drugs “off-patent” before term if others in category are expiring Branded pharmaceutical firms paying generics manufacturers to withhold generic from market pending legal review, offering an “authorized generic” or acquiring generics companies Co-marketing and strategic alliances among the majors is common Continued consolidation via acquisition activity, vertical integration into biotech, and partnerships/joint ventures

Rivalry is medium-fierce

Industry profitability is still relatively high

Emerging market competitors increasing pressure in generics

Growth is slowing except in emerging markets where price pressure exists

Brand spending ion blockbuster drugs is high

Patent protection provides some immunity from competition, but firms are pulling drugs “off-patent” before term if others in category are expiring

Branded pharmaceutical firms paying generics manufacturers to withhold generic from market pending legal review, offering an “authorized generic” or acquiring generics companies

Co-marketing and strategic alliances among the majors is common

Continued consolidation via acquisition activity, vertical integration into biotech, and partnerships/joint ventures

Source: “Rebuilding the R&D Engine in Big Pharma”. Jean-Pierre Garnier. Harvard Business Review . May2008, Vol. 86 Issue 5. The industry is feeling great pressure to deliver shareholder value to match the gross margin increases over the last 20 years.

This is truly a global market, with different characteristics and pressure points. Source: Pfizer at Citi Investment Research Global Health Care Conference, May 21, 2008

What lessons can we learn from the Teva value chain? Consistency throughout is key – choices are made so that activities and the value chain is configured to be consistent with the advantage desired and the markets chosen. R&D Inputs Operations Marketing & Sales Distribution Servicing Supplier Value Chain Firm Value Chain Customer Value Chain

Summary: Teva’s success is not due to an attractive industry structure, but how it has arranged its operations and targets within the industry. Teva exploited restrictions on direct foreign investment to license drugs and create a pool of Israeli expertise It uses innovative partnerships to build R&D capabilities Blockbuster branded pharmaceuticals command a price premium Generics business achieves scale and process economies The company has a consistent message that flows to how it allocates its resources – performance, fit and manufacturing Teva ‘s balancing act is a deliberate choice of strategic positioning. It is not “stuck in the middle”!

Teva exploited restrictions on direct foreign investment to license drugs and create a pool of Israeli expertise

It uses innovative partnerships to build R&D capabilities

Blockbuster branded pharmaceuticals command a price premium

Generics business achieves scale and process economies

The company has a consistent message that flows to how it allocates its resources – performance, fit and manufacturing

Where should Teva focus in the future? Consolidate the U.S. and other substitution-oriented generics markets Further expand into the global branded generics markets Turn itself into a more specialized generics or even an innovative firm Is this an either/or proposition? How could it manage the capabilities to succeed in multiple efforts?

Consolidate the U.S. and other substitution-oriented generics markets

Further expand into the global branded generics markets

Turn itself into a more specialized generics or even an innovative firm

Where is the profit? Estimating Teva's Returns from Copaxone (2005) Total Copaxone Revenue $1.2 billion Teva Share of Copaxone Revenue 55% $647 million Less Cost of Goods Sold (10%) ($64.7 million) Less Research & Development Costs (14%) ($90.6 million) Less Selling, General, Administrative Costs (10%) ($64.7 million) Copaxone Operating Income $427 million Copaxone Operating Margin 427/647 66% Teva Total Revenue $5,250 million Teva Non-Copaxone Revenue 5,250-647 $4,603 million Teva Non-Copaxone Operating Income 1,313-427 $886 million Teva Non-Copaxone Operating Margin 886/4603 19% Teva’s margins for Copaxone are 3x higher than for the rest of its other products…but the volume from generics has allowed Teva to leverage scale and unit costs fall by 30% from 2001 to 2006.

How is Teva really doing in generics? Teva’s message has been aggressive, but on other hand, its revenue per drug has suffered in its key market, the United States Teva’s Performance in US Generic Market 2005 2004 U.S. Generics Revenue $2,166 million $2,173 million No. of U.S. Generic Prescriptions 252K 220K Revenue / Generic Prescription $8.60 million $9.88 million Percentage Change -13%

Key Class Take-Aways A sustainable competitive position is based on what is valuable to buyers. Companies need to consider carefully the costs and the sustainability of the position. Competitive advantage arises out of aligning internal resources across the value chain. Success arises out of a set of coordinated actions across a company’s value chain A value chain focus supports companies when they need to reposition in the face of competitive or environmental shifts. You must carefully consider entering a market where you do not clearly offer a superior or distinct value proposition! Consider environmental/external changes and competitive vulnerability (and likely reactions) in your strategy development .

A sustainable competitive position is based on what is valuable to buyers.

Companies need to consider carefully the costs and the sustainability of the position.

Competitive advantage arises out of aligning internal resources across the value chain.

Success arises out of a set of coordinated actions across a company’s value chain

A value chain focus supports companies when they need to reposition in the face of competitive or environmental shifts.

You must carefully consider entering a market where you do not clearly offer a superior or distinct value proposition!

Consider environmental/external changes and competitive vulnerability (and likely reactions) in your strategy development .