Teva gambles on innovation

Gali Weinreb

Teva is betting $3.2 billion on a company with no approved products.

Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) yesterday announced what is an unusual acquisition for it - Auspex Pharmaceuticals, which is developing drugs for treatment of hyperkinetic movement disorders. Although the company still has no drug approved for marketing, its price tag was $3.2 billion.

Teva has acquired products before their approval in the past, but for much lower sums, or at a contingent price. It has spent much higher sums acquiring companies with approved and sold products with a production system, logistics, proven sales activity in interesting markets, and special R&D capabilities. This is the first time, however, that Teva is acquiring a small company at such a price, in which the purpose of the acquisition is mainly to acquire the product and technology that made its development possible.

Teva wants to be an innovator

Teva's acquisition of Auspex is a significant development in its strategy. The acquisition is designed to obtain a given product with potential and also indicates Teva's intention to re-emphasize the innovative aspect of its business, after former CEO Jeremy Levin made no significant acquisitions at all, and offered the market no clear substitute for Copaxone, claiming that the company could be stable and prosperous without one as a company specializing in generic and "improved generic" products (products based on existing molecules, but in a version offering a significant competitive advantage). Levin spoke of Teva's need to continue developing innovative products, but did not cite any particular product that could be a substitute for Copaxone.

Current Teva CEO Erez Vigodman, who took up his position a year ago, has also emphasized the company's ability to grow without "another Copaxone" (especially after it turned out that Copaxone's life span was expected to last longer than planned). At the same time, like his predecessor, Vigodman also declared that he had no intention of neglecting innovation.

In its recent acquisitions - a drug from Labrys Biologics for treating migraine headaches and the current acquisition of Auspex - Teva is taking its first concrete steps in a long time to recreate a significant pipeline of innovate products. This measure indicates that Teva does not really intend to allow its innovative activity to fade, and it appears that Vigodman does not believe that Teva can continue satisfying the market and doing profitable business without having a number of innovative products for major markets.

In order to justify the price of the acquisition solely through the innovative products, these products will have to produce at least $500 million in annual revenue. That will only happen if the leading molecule is approved in all three of its forms - for treating Huntington's Disease, Dyskinesia, and Tourette syndrome - and competes successfully with Lundbeck. Teva believes that now that its revenue from Auspex's business will reach a peak of $2 billion, and revenue will already total $150 million from 2017 - enough to contribute to the company's bottom line. That is a rather ambitious target for these products.

It should be noted that in view of the history of mergers and acquisitions in the industry, there are not enough low-risk and reasonably priced assets for sale in the market at present with focused potential in psychiatry and neurology, and which are free of involvement by a major drug company.

Judging by the potential of the company's technology, the acquisition appears more than suitable for Teva. It fits exactly into the improved generic category, in which Teva is poised to succeed, due to its background in both areas: generic drugs and innovative products. Although biotechnology platforms are not usually considered to have independent value, and attention is focused on the products resulting from them, it appears here that the platform is indeed a strategic asset for Teva of already proven viability with trial successes for the leading product. There are other companies in the market with a similar technological platform that are traded at much lower prices, so it nevertheless appears that most of Auspex's value in the deal is derived from the products, not the platform, which does, however, constitute a handsome bonus.

Published by Globes [online], Israel business news - - on March 31, 2015

© Copyright of Globes Publisher Itonut (1983) Ltd. 2015

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