It’s not every day - fortunately it should be said - that Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA; TASE: TEVA) falls 9.5% in one session on Wall Street. It happened yesterday on a trading volume that surpassed even that of Google Inc. (Nasdaq:GOOG). $2.5 billion was shaved off Teva’s market cap. What happened to the people’s share? The answer is simple. Despite every attempt by Teva to calm things down by saying that it will meet its guidance, the muscle flexing by heavyweight Merck & Co. (NYSE:MRK) scared everyone.
Teva planned to launch its generic version of Merck’s ethical anti-cholesterol drug Zocor (Simvastatin) on Friday, when the drug’s patent expires. After exhausting all legal means to prevent it, and seeing how Teva was about to sell generic Simvastatin under an exclusivity period, Merck came up with a new ploy. A company like Merck will not easily surrender a monopoly on a drug with $4.6 billion in annual sales.
Instead, Merck signed an agreement with US insurance company UnitedHealth Group Inc. (NYSE:UHS), and may sign more with WellPoint Inc. (NYSE:WLP) and other companies, under which Merck will pay them a certain amount and they will sell Zocor to consumers at a lower price. In this way, Merck is fighting to preserve for a share of the Zocor market using a method never before employed by an ethical pharmaceutical company.
“The launch of Zocor is the largest ever by the generic drug industry,” Teva president and CEO Israel Makov told “Globes” today. “This is the largest innovative product ever exposed to competition, so it’s natural that Merck will try to keep a share of the pie in the generic stage. Generally, ethical companies enjoy a 5-10% market share for years, and they’re satisfied with that, since their profit margins are very high. Although the step appears threatening, the deals Merck has signed, as far as we know, are marginal.
“For example, the maximum effect of the agreement with UnitedHealth amounts to 5% of the market. We also assume that they won’t be able to switch 100% of the insured population to generic versions only; other interests are also involved. In addition, there is no saving to the national economy such as generic drugs create. There’s a reason why consumer groups, wholesalers and senators are up in arms. Senator Charles Schumer has contacted the Federal Trade Commission to probe this matter.”
“Globes”: Merck seems to be emotionally involved in this matter.
Makov: “No. It isn't acting out of emotion, and it certainly isn't doing something, or not doing something, because of Teva. There is an array of business and economic calculations involved, and Merck is trying to mitigate the impact of generics on its product. Something else interesting in happening here, too. Zocor’s market will probably to continue to grow, even though generics are already here, because of the combination of Simvastatin and another drug, Lipitor.
“All in all, I’m not sure that Merck’s deal is economically sound. Although I haven’t seen Merck’s books, this definitely isn't a general economic solution for other cases. It’s impossible to eliminate the generic drug industry. That’s not a paradigm that will develop. On the face of it, there’s no justification for the measure, and I reiterate: the overall impact on the market will be limited.”
Teva fell 9.5% yesterday. Investors are afraid. The fact that you said you’d meet guidance for Zocor didn’t help the share.
“The financial market yesterday responded to a new phenomenon in an extreme way. It cannot be ruled out that this will ultimately turn out to be much ado about nothing. Obviously, something is going on, but the reaction was overdone. I nevertheless prefer not to comment on the stock market. I’ve always said that our performance will be the ultimate criterion, and fluctuations in the share on a particular day or month are meaningless, and have no effect over time. We didn’t provide guidance for Zocor to help the share. A lot of people have called us, and we wanted to make it clear that nothing has affected us as far as meeting the guidance is concerned.”
Were you expecting this? How surprised were you?
“We know that the original companies will try always to find ways to increase their share of the economic pie. We take this into account. We’re very competitive, and a little competition doesn’t frighten us. We usually emerge in good shape from competitive situations, just as we have reacted positively to approved generics. We’ll still be competitive even under these circumstances.
“We’ll launch the drug on schedule; this has no effect on the timetable. We can’t be frightened by pricing. We meet every price on the market, certainly those of our generic competitors, and we’ll now face an innovative rival, too - Merck.”
What does this say about generics? Maybe Pfizer Inc. (NYSE: PFE; LSE: PFZ) will try something similar when its patent for Zoloft expires?
“It’s clear to you that it’s impossible to eliminate the generics industry, right? Its role is very important, as is its contribution to the economy. The calculation is this: spending on drugs in the US amounts to $275 billion a year, and generics account for 10% of this figure, i.e. $27.5 billion. In addition, 55% of prescriptions are for generics. Picture this: 45% of prescriptions cost $250 billion, and 55% cost $27.5 billion. If the generic industry vanishes, who will pay the difference? It’s illogical. As I said, we don’t think that the Zocor case will be repeated; it’s impact is a one-off event.”
Published by Globes [online], Israel business news - www.globes.co.il - on June 22, 2006
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