TEVA Case Study
TEVA Case Study
Structure of the Generics Industry using Porter’s five forces
1. Threat of new entrants – Low
a. High capital requirements –Research and development costs typically around $30-50B per year for large companies; Sales and marketing when drugs are marketed cost 30-35% of firm’s revenues; Lead time for generic product development takes three to five years; new entrants need to gain access to distribution channel. b. Incumbency advantages independent of size – Incumbents releases their own “authorized generic” during the 180 day exclusivity period; proprietary advantages in the form of patents c. Restrictive government policy – Patent protection; government regulated such that it dictates the price of drugs for a particular country or there is market-based pricing. d. High risk industry – one out of every 5000-10000 compounds tested becomes an approved drug, and half of the drug development costs are expended on drugs which never reach the market.
2. The Power of Suppliers – Medium
a. Companies can backward integrate and create their own active pharmaceutical ingredients (API), at the same the supplier group can threaten to forward integrate and become industry players. b. Industry participants may face switching cost in changing suppliers when they have connected their production lines to a supplier’s manufacturing facility.
3. The Power of Customers – High
a. Generic drugs are not at all undifferentiated. Customers can always find equivalent generics that are available in the market for a lower price. b. Buyers face few switching costs in changing vendors as the generics have the same efficacy of counterparts. c. Some countries have the government for a buyer and can impose certain restrictions and demand the price on drugs.
4. The Threat of Substitutes – very low
a. Some people may just choose to die and not take drugs to cure illnesses.
5. Rivalry among Existing Competitors – High
a. Competes in Price – price discounting, price guarantees are employed so
that industry players retain market share, as in the case of Teva where it would forego profit to retain market share. b. Competitors are numerous and top industry players are giants in the industry with large market capitalization.
How and why has the industry evolved in recent years?
The industry’s revenue is being lessened because of expiring patents and limited pipeline especially for the Big Pharma players; as a result, traditional pharma firms have acquired generic arms for their company. Some industry players are also able to leverage on labor intensive production of drugs by producing in countries with lower labor cost. European countries are opening up to legislation to be pharmacy driven. The US market has been very attractive to industry players because of relatively liberalized laws for the industry. What macro-environmental factors have impacted the industry? Political – Foreign trade regulations can influence the industry especially for global operating industry players; some countries in the Middle East have political instability; trading agreements association of countries can affect the industry as well as some countries may not have patent law protection Economic – cost of labor in some parts of the world; exchange rates that are critical for companies that are operating in countries other than their own. Legal – countries that circumvent patent laws have an effect on the industry; patent protection laws, government regulated generic industry in some countries; government dictates price of drugs Sociocultural – generic substitution are viewed by Asian countries to have less potency than branded counterparts Technological – advances in technology can save industry players R&D cost and boost revenues by speeding up the process of introducing new drugs. How is Teva positioned vis-à-vis its rivals in Israel?
Teva embraces a highly focused approach. The core of Teva’s business is to price its product low compared to competitors. Teva represented the gold standard of business in Israel.
Teva has positioned itself thru low cost leadership.
a. Arenas – Teva is the world’s leading producer of generic pharmaceuticals; produced innovative drugs whose R&D is now capable of producing at least one innovative drug every year; world’s third largest API supplier; significant presence in Israel, North America and Europe b. Staging – Teva started in Israel and chose to first expand abroad in the United States. Expansion followed in Europe and other countries. c. Vehicles – entered the US market thru a joint venture with a major American conglomerate which gave them access to capital and networking. Teva has since been expanding in Europe and other countries thru Mergers and Acquisitions of significant industry players in specific geographic areas; Teva has partnered with educational institutions in Israel to help defray the cost of R&D for drug creation. d. Differentiators – Teva provided not only a broad scope of products but also entered these products in the market at the lowest prices and guarantees these prices. e. Economic Logic – Because of low prices of Teva’s products, nobody dared to take market share from them. Teva believed that whoever keeps the market share will be the one who will make money in the industry.
Teva reported a net income of over $1B in 2005 with assets totaling approximately $10B. Net sales reached $5.3 during the same year with a return on equity of 19%. Since its entry in US market, it has acquired various drug companies such as in Europe. Teva has economies of scale advantage that cannot be matched by other companies at this time even prior to the merger with Ivax. The company is also capable of sourcing raw materials on a larger scale than their competitors and has operations in India for labor intensive processes.
Teva built a reputation of fair treatment of employees – one value that is deeply held by its CEO and now chairman, Eli Hurvitz.
Teva’s supply chain was managed through several centers of excellence located globally to take advantage of differences in local labor skills and costs, tax provisions and intellectual property regulations. TEVA produced their own API and once produced, they were sent to pharmaceutical manufacturing facilities that supplied to the US and Europe. Once packaged, they were shipped to various markets in US and Europe and distributed locally.
The value in Teva’s system exists in the management and marketing in each region while operating as a global company with R&D, manufacturing and APIs. I consider Eli Hurvitz to be the extraordinary resource of Teva. The then CEO and now chairman has brought the company to its current position. He is the only resource that can’t be imitated together with the drive of executives and employees; Teva’s human resources mix and culture have been the primary unmatched capability of the company.
A. Teva acknowledged the commodity-like nature of the industry and kept its focus on low prices. Pricing of Generics has been the core of Teva’s business. Teva provided inventory management, volume based discounts and pricing bundles that are important to cost-conscious chains. If competitors lowered prices after the contract was signed, Teva would give customers credit. Teva sought to gain advantage through rigorous execution, including filing ANDA applications earlier and with fewer revisions than its competitors, backward integrating into active pharmaceutical ingredients and efficiently managing its supply chain. Teva maintained a large pipeline of Paragraph IV as well as a broad portfolio of commodity generics which is an elusive balance for its competitor. Teva partnered with educational institutions in Israel to defray cost of R&D in the creation of drugs. Teva sought partnerships to manage sales and marketing of drugs.
If I were the CEO of TEVA, I would continue my focus on Generic drugs in US and European markets as major blockbuster drugs are set to lose their patents. Current market share is at 20% in the US and still a significant share is not claimed in Europe. There is demand for lower-cost alternatives to expensive drugs as the aging population grows and healthcare cost rise. Lead time for generics development is only three to five years compared to innovative drug development that can take up to 15 years. Not to mention the costs and risks that comes with developing innovative drugs. Generics
industry growth is expected to speed as much as 16% in major markets and I intend for Teva to get a big chunk of this growth.
I would leverage Teva’s partnerships with educational institutions to develop biosimilar versions of large molecule drugs. There is a multibillion dollar market for these drugs that is expected to grow to $112B by 2012 and is an underdeveloped segment of the industry. This segment is where I would primarily put my R&D into use.
Teva is vulnerable moving forward if it continues to adapt a wait-and-see strategy before entering the generic market in Germany and France whose market is expected to increase by 9.7B and 3.3B respectively. Both these markets are some of the biggest in size and potential. Other companies are already aggressively expanding into continental Europe. The positions that these companies have in the latter could become difficult for Teva to displace later. Even in countries such as Japan or other countries in Asia, Teva should begin on acquiring or merging with companies to have significant presence there. Teva, in partnerships with the government of countries in Asia and other untapped countries, has the ability to shape the industry by changing people’s perception about generic drugs. Teva should have the first mover advantage in these countries and introduce their generic brands.