Teva torn between two very different types of drugs

Teva
Teva

Teva is faced with an identity crisis: generic or branded pharmaceutical company? IBI VP Elah Alkalay discusses the challenges.

The first challenge facing Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) is an identity crisis.

The revolution took place in the 1980s. More and more generic drugs entered the US market, and the growth rate in business was phenomenal. According to Google Finance, the growth rate in the Teva share price from the beginning of the 1980s until today is 10,000%. Growth in the sector resulted in an increasing number of companies, an abundance of solutions, and competitors, but as the growth rate in the market waned, consolidation waxed.

In the beginning, there were Teva and Watson Pharmaceuticals. Then consolidation arrived. The following is an extremely incomplete list of the acquisitions by the two companies: Teva acquired Canadian company Novopharm, US company Sicor, US generic drug manufacturer IVAX Corporation, Barr Pharmaceuticals, Ratiopharm, and more. Watson bought Ascent, Specifar, Andrx, and Schein. Watson acquired Actavis Group in 2012, and adopted its name. The company made two more significant acquisitions in 2014: Forest Laboratories for $25 billion, and Allergan for $60 billion.

Teva and Watson's first acquisitions were in North America, but when it became clear that the US market was not going to continue providing a growth lever forever, the two companies switched to acquisitions in Europe and the rest of the world. They achieved dispersal, but did not really get the growth engine they were seeking.

In the Teva annals, the year 1996, the birthdate of Copaxone, will always be remembered. To this day, even though Copaxone is one of the thousands of products made by Teva, the drug accounts for 46% of the company's operating profit. It is the difference between working hard and winning the lottery. It is also the difference between the branded drug market and the generic market. For Teva, it was its first experience in the big leagues.

On the one hand, more than any other measure, Copaxone contributed to Teva's wealth, stability, growth capability, and its entire organization. On the other hand, it led to a decade of identity crisis - a decade in which Teva invested most of its efforts in trying to become a company of branded products.

Actavis (now known as Allergan) did not have Teva's luck - it did not win the branded products lottery. It had branded products, it had special products, but it did not have a big seller like Copaxone. In contrast to Teva, which has been wondering what kind of company it is for a decade already, Actavis decided only nine months ago, in November 2014, to cross the lines and adopt the new identity of a branded products company.

Actavis invested $60 billion in an original products company named Allergan. The big surprise was that within nine months, this union resulted in a "miscarriage" by Actavis. Allergan, controlled by Actavis shareholders, stopped its hesitation: it is now selling its generic business to Teva, leaving it with no debt, a big stack of cash, and an old, but emptied, original company.

Low price or competitive market?

In the evolution of the US generic market, the most recent development was caused by the Affordable Care Act (ACA), one of the most important things that has happened to people in the US in recent years. It is hard for Israelis to realize the scope of this revolution when we enjoy (and complain about at the same time) a health system that treats almost everybody equally. In the US, however, thanks to Obamacare (AKA - ACA) tens of millions of people obtained health insurance overnight, including coverage for the drugs they must take.

As a result, the quantity of generic drugs sold has risen dramatically, but price pressure has also increased. The US health insurance market is undergoing consolidation in tandem with the generic market. Only this week, two of the largest health insurance companies announced that they planned to merge, thereby reducing the number of providers in the market from five to only four.

So we are looking at a market that grew and flourished for 20 years, and then the number of patents plummeted and government procurement applied a pile driver to the little profit margin left in generic drug prices. Like in any market with very low profit margins, only the giants can survive - those who can sell such large quantities that even tiny profit margins are translated into a lot of money, or at least enough money for the company to function, retain its shareholders, and sustain its business.

What is left? A concentrated market. What was once a market with many dozens of companies, a variety of business models, a great hunger to succeed, and a great deal of creativity has become a market in which the only criterion that counts is price. What is better for the economy? It appears that in the Western world, this is still an open question.

Whither the pharma market?

The technology, access to information, and cheaper marketing pipelines are all processes making more new products possible, and enabling more competitive products to reach more patients more quickly and more cheaply. The major companies still benefit from their well-oiled marketing pipelines, reputation, and a large stable of advertisers, but the future is starting to look ominous. The care taken by patients to take the drugs for a long period, more personalized drugs and treatments for smaller groups of patients, more preventative treatment, and less treatment of symptoms - these are some of the specific characteristics of this market, which is now becoming a reality.

How will these changes, which will be gradual, and which could take 20 years, affect the market dynamic? Will we once again see products like drugs for reducing cholesterol sold for tens of billions of dollars a year, or will we see a broader range of drugs sold to smaller groups, so that each product generates only hundreds of millions of dollars? Will a situation of a "flat world" in which anything can be bought anywhere affect the market dynamic? Will price gaps like the ones existing even between Canada and the US continue to exist at a time when online buying habits are striking root? Given that it takes over a decade and hundreds of millions of dollars, if not more, to develop a new drug, there is no doubt that addressing these questions and the changes expected in the market will occupy a growing place in the discourse among investors in this sector.

The generic market has reached a peak in the US, and it is hard to visualize it changing dramatically in the rest of the world. The branded drug market is expected to experience upheavals that are still very hard to foresee. Assuming that Teva completes its acquisition of Allergan's generic division, thereby creating the world's largest generic company, will this mean that Teva's identity crisis is over? Is the risk in the company greater or smaller? Are we saying a final farewell to the growth company, and getting a value company in exchange?

There is no doubt anyone investing in Teva today has some difficult thinking to do. Nevertheless, if there is an industry in which demand is passing the visible horizon - and is therefore solid and stable - that industry is the pharma industry, and Teva is unquestionably our flagship on this ocean.

Elah Alkalay is VP business development at IBI Investment House Ltd.

Published by Globes [online], Israel business news - www.globes-online.com - on August 5, 2015

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

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