Teva Pharmaceuticals is a pharmaceutical company specializing in generic and proprietary drugs. It is the world’s 11th biggest pharmaceutical company. Apart from its major market, US and Europe, it has a major presence in Russia, Latin America, Japan and South Korea. In 2012, it had revenue of 20. 3 billion and a net income of 1. 96 billion (see table 1).
Target Customers: Teva pharmaceutical’s primary customers are wholesalers and retail drug chains.
Physicians and hospitals are the other major customers. Women with hormonal ailments and patients above 65 also form an important and a growing market. Also, many pharmaceutical companies purchase active pharmaceutical ingredients (APIs) from Teva Pharmaceuticals. Product Offering: Teva pharmaceuticals have a variety of product offerings (see table 2).
They are: * Generic Pharmaceuticals: Global leader in generic drugs. * Proprietary Pharmaceuticals: Copaxone®, Azilect®, Provigil®, Cephalon® and Theramex® * Biopharmaceuticals: biosimilars such as Tevtropin Active Pharmaceutical Ingredients: world’s leading manufacturers of APIs * Women’s Healthcare Products: LoSeasonique® and Plan B One-Step® * Respiratory Products: Qvar® and Proair® Strategic pillars: * Teva’s main focus is to have a strong presence in generic market industry and APIs using its economies of scale. Nearly 50 % of its income comes from generic market (see table 2).
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Teva will continue to extract maximum value from Paragraph IV patent challenge opportunities, by pursuing first-to-market opportunities, by developing complex generic products, and y enhancing the value of its portfolio by concentrating on high-margin, low competition markets. * It also has started to focus on proprietary drugs and biopharmaceuticals. It accounts for more than 40% of its revenue in 2012, up from 35% in 2011. Teva has achieved this primarily through acquisitions of specialty drug companies. Moreover the threat of patent expiry poses a challenge. Its blockbuster drug Copaxone® is facing this challenge. * Teva is actively involved in entering new markets.
It seeks to achieve market leadership in japan and Russia by product portfolio management and also expand its early stage businesses in markets such as South Korea, China and India, and seek to enter new markets such as Brazil and certain South East Asia markets. * Heavy investment in R&D to develop and produce affordable biopharmaceuticals by leveraging on its formulation and manufacturing expertise. This is necessary to overcome the expiry of patents which leads to generic competition. However, Teva’s R&D expenditure amounts only to 7 % of revenues which is lower than the industry standard (16-20%).
Therefore for a tangible growth, they have to invest heavily in R&D. * Extending its already significant vertical integration to its own pharmaceutical production. It introduced initiatives designed to reduce overall operating costs and complexity through a wide scale cross-functional effort to create a more efficient organization. Particular attention was given to improve procurement systems by leveraging its purchasing power and improving our production network, supply chain, and resource deployment processes. Recent focus in entering niche businesses to differentiate itself from its competitors. This has been achieved by acquisitions (Barr pharmaceuticals, Ratiopharm, Taiyo etc) and in partnership with other companies (Joint ventures with P&G, collaboration with Handok, South Korea and Xenon Pharmaceuticals).
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Industry Analysis: The pharmaceutical industry is a $1 trillion-dollar industry, with a CAGR of 5%. Traditionally, USA has been major market followed by Europe and Japan. The top 20 companies account for 77% of the market share (see figure 1).
The HHI index is 378 indicating a highly competitive market. Porter’s 5 forces analysis indicate that: 1) Threats of entry posed by new or potential competitors – LOW High capital expenditure into research and development, lengthy approval process, marketing before any realized returns are a major deterrent for any new entrant. It is a highly regulated industry. Also, the presence of “big pharma” companies deters new competitors. 2) Degree of rivalry among existing firms – HIGH It is a mature, consolidating, highly competitive industry.
Companies operate off of high margins (high 70%).
Smaller companies either go bankrupt or bought out by bigger companies. 3) Bargaining power of suppliers – LOW There is little room for negotiation. Large pharmaceutical companies generally enjoy significant buying power. 4) Bargaining power of buyers – LOW Generally consumers have very little bargaining power as medication is prescribed. Apart from US where there is pricing flexibility, governments in other markets enjoy substantial pricing leverage. 5) Closeness of substitute products – MEDIUM
There is a growing threat from generic competition due to their global operations that can achieve lower-cost of supplies. Also the threat of patent expiry poses a challenge to pharmaceutical companies. Based on Porter’s model, LOW to MEDIUM forces are present among the strong players in the pharmaceutical industry. Thus, the industry is attractive to investors largely due to the high-barriers to entry, purchasing and pricing power, and strong credit profiles of existing firms. Competitor analysis – ACTAVIS Inc. : The closest and the fiercest competitor to Teva Pharmaceuticals is Actavis Inc.
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The company was formed after Watson Pharmaceuticals acquired privately-held Swiss-based Actavis Group in 2012. They are currently the third in the global generics market after Teva pharmaceuticals and Sandoz (subsidiary of Novartis AG).
Not content with the generics market, Actavis wants to expand the number of branded drugs in its portfolio for better diversity. The company markets more than 750 generic products globally through operations in 60 countries, holding a strong position in generic oncology injectables and a growing position in OTC products.
The brand-name drugs in its portfolio are principally geared at urology and women’s health. Even though it is growing at a faster rate than Teva pharmaceuticals, it has a long way in catching up. It has one third the market cap of Teva pharmaceuticals (see table 4).
Its revenues are 29 % of that of Teva pharmaceuticals. It doesn’t have the product portfolio in branded drugs like Teva pharmaceuticals and most of its revenues are from low margin generic market.
Due to recent acquisitions and mergers, operating cost has increased and hence net income is less than 1 % of that of Teva Pharmaceuticals. In my opinion, Teva pharmaceutical has huge potential to grow given its standing in generic market, increased focus proprietary products, entry into emerging markets and diversified drug portfolio. However for long term substantial growth, Teva has to focus on threat from generic competitions by innovating through R&D and vigorously pursuing acquisitions of specialty drug companies. References:
