Starting in Israel, the firm saw significant opportunities for growth in an economy that was also growing at a fast pace. However, Eli Hurvitz, former CEO and Chairmen, recognized that the company had grown as far as it could within its home market. He hired Dr. Joseph Aleksandrowicz to head the strategic planning process for the company. Still, Teva focused on generic or bioequivalent versions of the Big Pharma or what they call the their innovative counterparts. These innovative companies, who had more capital and controlled a lot of the industry, were going to pose a big threat to Teva.
Not only were they fighting patent challenges against the small generics, but they were acquiring many of the generics too. In addition, Teva continued to battle other low-cost firms operating in abroad while Teva fought against rising market prices in The United States. This rise cut into Tevas pricing by 15-30% over three years causing them to take significant blows to their revenue stream. However, many generics lasted due to the fact that most of the population was aging making consumers find a more cost effective option.
Analysts began wondering how Teva could continue to see annual growth of 33%. History shows that the generics typically had lower profitability compared to the innovative firms, yet Teva showed six reason why they became the benchmark for most generics. One reason was the 180-day exclusivities. This 180-day period gave incentives to generic firms to submit an ANDA under paragraph IV that allowed generics to challenge innovative drugs long before patent expiration. Generics often used these to challenge follow-on patents that innovative firms used to extend the lifetime of their patents.
After the $7. 4 billion dollar acquisition with Ivax, Teva not only received a share of two blockbuster drugs (Zoncor and Zoloft), but they acquired forty-six first-to-file Paragraph IV applications that covered drugs with $35 billion in branded revenues. Secondly, Teva controlled roughly 18% of the base U. S. generics market, which was most on a number of prescriptions basis. They also continued to see profits with expansions in large markets, like the U. K. and Japan, who showed signs of the pharmacy driven model and not the physician driven model.
Fourth, Teva was taking over Latin America, which was controlled previously by Ivax, giving them approximately 25% of their profits. Using the acquisition to find another way of profits, Teva then decided it would be best to move into the niche and biosimilar markets (products that were greater in size and harder to copy). They believed this would help them grow their respiratory franchise to about $1 to 2 billion dollars by 2010. Finally, their top drug Copaxone, a drug for multiple sclerosis, was believed to be their big profit driver because it differed from the typical innovative firms.
Teva used lower R&D costs, sales and marketing expenses, and efficient supply chains to give them nearly $1. 2 billion in sales and ultimately a large profit margin. While these six indicators led to Tevas profits, many believed it was going to be tough for them to sustain. Not only were there threats of new low-cost entrants emerging in the generic industry by using Tevas successful strategies, but also innovative firms had finally figured out a way to limit generic growth.
For one, they became aggressive by fighting for their hard earned patents, in which innovative firms were known for spending more on R&D. Secondly, the big players were pushing their way into the generic industry themselves. Novartis, one of the largest pharmaceuticals, had spent $10 billion on generic acquisitions in 2001. Today, Novartis has the second largest generics segment in the world. Going back to the low-cost firms, new entrants started breaking ground in India in which they were able to operate at the thinnest price margins.
With the threat of new entrants and the bullying from the Big Pharma firms, many believe that Teva will struggle dealing with these threats. Still today, Teva survives and looks for growth by operating on thin margins. In the generics industry, the best firms are those with efficient supply chains gaining scale benefits at low costs while still being capable of revealing large-scale products on a number of product lines. Teva is able to this and is constantly updating their supply chain to help give them hope that they can beat the threats.
Also, they believe they can sustain growth by having an efficient R&D department that produces at lower expenses. Finally, Teva dominates the M&A market with over $12 billion in acquisitions helping solve the consolidation issue in the generics industry. If Teva can continue to push these potential sources of future growth, they may be able to sustain. I do believe that the Big Pharmas will be able to push around the small generics, but that they will also force firms like Teva to consolidate.
Teva could potentially get bought out by a firm like Novartis simply because the innovative firms are entering the generic industry and locking down on their patents. All in all, this case does a magnificent job of portraying how important the strategic process is. For such a highly competitive industry, companies are fighting new entrants (the generics) and a threat of substitutes assuming no patent ever fully covers a product. The competition essentially forces companies into consolidation, which is why this industry has a lot of M&A deals.
If Teva is going to survive, they may want to consider basing most of their business outside The United States as regulations continue to get tougher in the healthcare industry. I think Teva can survive in this industry simply because they are one of the larger generic players in the industry. I think they will be forced to buy other generics to compete with the innovative firms as patents are becoming more strictly enforced. In a society that is still aging, the need for the more cost effective generics will still be there ultimately increasing Tevas revenues.