Teva Pharmaceuticals Case Study Essay
Teva Pharmaceuticals Case Study
A company like Teva Pharmaceuticals is subject to all of the factors of the external environment given the nature of its business and global expansion. Pharmaceuticals is an industry where high profits can be achieved, but it is also an extremely challenging business when one considers all of the political/legal aspects involving government regulation and patents. Every country has strict regulation and testing requirements for drugs that affect companies differently depending on their position in the market. Originally, innovative pharmaceutical companies had to obtain patent protection and FDA approval but this would translate to years of protection from the generic competition.
Once the Hatch-Waxman Act was put into effect in the United States, this opened the door for generic pharmaceutical companies to legally challenge patented drugs. Generic drugs have an easier time getting FDA approval and under “Paragraph IV” of the act, the first company to file an Abbreviated New Drug Application would enjoy a 6 month exclusivity period where the only two competitors in the market would be the first-mover generic company and the innovative firm. A liberalized market, like in the United States, is much more attractive to the generic pharmaceutical firms because they required less marketing and sales expense as well as no government price regulation.
The legal aspect of the pharmaceutical industry ultimately dictates the type of competition that exists within the market. Innovative firms must do a good job of protecting their accomplishments while strategizing in order to deal with the repercussions of the Hatch-Waxman Act. The generic companies on the other hand now have to be vigilant in order to be the first-movers with respect to ANDA, and must be capable of competing with the branded firm and its possible “authorized generic,” along with any other generics companies that are able to compete after the 180-day exclusivity period.
This allows for fierce competition that translates to lower prices for consumers which is important considering these are health care products but that also amounts to a market flood of competition following the expiration of the 180-day duopoly. The legal battles created by government laws between the innovative and the generic industries also play a huge role in the strategic planning of a business. Both innovative and generic companies must make sure anything they get involved in will be profitable considering all legal aspects seeing as pharmaceutical legal battles don’t come cheap.
It’s no secret that the pharmaceutical industry is not an easy one to penetrate. Using Porter’s famous five forces one can gauge the attractiveness of an industry. The industries outlined in the text were innovative pharmaceuticals, generic pharmaceuticals and biosimilars and each of these industries are affected by these forces. Initially it is important to consider the barriers to entry of an industry to determine if it is easy for other firms to penetrate the industry. For an innovative firm, capital requirements, government policy and expected retaliation are the most significant factors. An innovative firm needs a lot of initial capital in order to invest in the research and development necessary to take a drug from the lab to the market. This type of firm is also required to vigorously protect its invented drugs against other generic firms waiting to take advantage of the Hatch-Waxman Act. Government regulation also makes drug development a long process considering all the clinical trials and government approval needed. A generic firm does not need as much initial capital because it does not have to recuperate initial R&D costs as well as big marketing and sales expenses.
A generic firm is primarily concerned with economies of scale and taking advantage of the Hatch-Waxman Act. If the firm is able to achieve high economies of scale like Teva, it is very hard to compete with their prices. Also, firms that are vigilant and efficiently challenge innovative firms via ANDA, are the firms that enjoy success. Even though the capital requirements are less demanding in generic pharmaceuticals, it is still a very expensive venture and extremely competitive, making it hard to penetrate as well. The biosimilar industry is undeveloped and competition is scarce, but it takes a lot of money and expertise to produce products that are as complex as these pharmaceuticals. Bargaining power of the buyer (pharmacies) is high in the generics industry that Teva is in. This is because price is what drives everything in generic pharmaceuticals. Of course, the reason why Teva is so successful is due to their size and ability to take advantage of economies of scale. Also they own Active Pharma Ingredients and are basically their own supplier of pharmaceutical ingredients.
Often Teva supplies other generics companies with their ingredients, gaining significant edge over their competition. A new generic supplier would not be able to support this kind of scale and could not be competitive with a company like Teva. Bargaining power of Teva as the supplier to other companies is high but its bargaining power towards pharmacies buying their products goes from medium to low as competition floods the market. Another one of Porter’s five forces is the threat of new substitutes, which is the main problem in the generics market. A new firm must be cognisant of the fact that every company in the industry will be able to produce the same product after the 180-day period and the product with the lowest price will be the most successful.
Intense rivalry exists between firms in the generic market, where the first to fill out the ANDA gets to enjoy a duopoly with the innovative company or a company positions itself to be the “certified generic” brand in alliance with the innovative company. This is the key to this industry; making money in that 6 month time frame. Once again the bigger companies have the most success with competition due to their ability to mass produce while concentrating a lot of effort to the legal challenges faced in the industry.
INTERNAL ENVIRONMENT (Financials)
Exhibit 2 compares all major pharmaceutical companies in 2005 and shows in percentage the gross profit, R&D expenses, selling and general administrative expenses, operating income and ROE. Gross profit makes up almost half of net sales, while R&D and SG&A are less than 25% combined. The most interesting of all these ratios is the return on equity because it signifies how well the company uses shareholder investment to generate earnings growth. Teva has a 19% ROE which is among one of the highest in all the companies considered on Exhibit 2. This is an important, forward-looking number because it is part of the fundamental formula for growth in finance (g = b*ROE) where b stands for the earnings retention ratio. A company with high ROE is likely to have positive growth opportunities in the future if it retains a sufficient amount of earnings.
INTERNAL ENVIRONMENT (Business Level/Corporate Level Strategy)
Teva initially chose a focused business level strategy and concentrated on generic pharmaceuticals. This way, they would not have to bear the high R&D costs associated with innovating and could concentrate on using their resources and capabilities to mass produce generics and be a cost leader. This type of business level strategy is known as focused cost leadership and this is what made Teva successful throughout the years. They used their knowledgeable staff along with good ties with Israeli Universities to make sure operations went smoothly. Their supply-chain was second to none and they made continuous improvements. Their sales force was small (concentrate on selling to pharmacies) and prices were set to generate volume (lowest possible price).
At the corporate level, I believe that Teva is new to diversification and is testing the waters with innovative and biosimilar pharmaceuticals, but not aggressively. As a result Teva practises related constrained diversification with the main goal of gaining and keeping market share. Although all the drugs are different, the skills required to synthesize the generic drugs are the same and the raw materials can be used for more than just one product. There is high operational relatedness when dealing with the generic market and less relatedness when looking at innovative and biosimilars. If the company choses to move into these areas seriously it will have to adopt more of a related linked strategy where there is less operational relatedness and more corporate relatedness. In the generics industry Teva achieves economies of scale by sharing activities and concentrating on an efficient supply-chain.
This translates to lower costs for consumers and greater market share for Teva. Hurvitz said that “…he who keeps market share will be the one who makes money in this industry.” Their competitive advantage stemmed from their size and as the years went on they were able to consolidate companies and continue to grow. Niche innovative drugs and biosimilars are possible to achieve for the company and the key to doing well in these industries is to efficiently transfer knowledge and skills from their successful generics strategies. For example, in the same way that they strived to effectively challenge patents, they would need to use that knowledge in order to create and defend their patents in the innovative industry.
There are incentives to diversify into related linked due to the acquisitions of Sicor (biosimilars) and Ivax (generic economies of scope). They successfully launched Copaxone and Azilect, so the potential is there; they just need to refine their corporate strategy and begin restructuring. They have the resources and incentives to want to diversify considering the US regulations were making that market less appealing than other up and coming global markets
INTERNAL ENVIRONMENT (Core Competencies)
In order to consider Teva’s core competencies, it is important to first determine their resources and capabilities. Teva has many tangible resources critical for success in this industry. Financial resources give them the ability to raise funds and capitalize on economies of scale. The firm has unrivalled generic physical resources; plants that can produce more than any of the other generic pharmaceutical firm and acquiring of cheaper raw materials due to economies of scale. It prides itself on having exceptional organisational resources in order to coordinate and share activities/knowledge efficiently. Of course, an established company like Teva has the technological resources available to ensure that they are able to produce as much as possible.
Intangible resources include technical expertise (human resources) in a field where knowledge and know-how is essential. By making some strategic decisions and business ventures, they have acquired companies that give them the ability to innovate and have gained reputation over the years for being a solid global competitor in the generics market. Out of all these resources and capabilities we find core competencies that are very hard for other companies to imitate. In order for a capability to be a core competency it must pass the four criteria of the VRIO. I have identified the following core competencies for Teva:
•Economic Capabilities (economies of scale)
•Organizational Capabilities (API/ANDA factory)
•Innovative Capabilities (Biosimilars/Niche Innovative)
All of the capabilities pass the VRIO requirements. Economic capabilities help the firm reduce costs which translates to lower prices for consumers and ultimately more market share for Teva. It is hard for competitors to compete with this kind of scale and consolidation capabilities. Organizational resources help them take advantage of the regulatory laws. For example, setting up the “ANDA factory” allows them to be a leader when it comes to being a first mover in the 180-day exclusivity department and running API gives them a huge advantage in being their own supplier. This is another valuable, rare and hard-to-imitate part of Teva’s business and can really put them ahead of the competition when practised vigorously.
Their organisational capabilities also allow Teva to manage firm infrastructure, human resources, technological development and procurement. Furthermore, with their new ventures, Teva has enriched their technological capabilities looking to a future in biosimilars and niche innovative generics. With their strategic work involving M&A they have valuable, rare and costly-to-imitate capabilities along with the ability to exploit them. Even though it will be hard to challenge innovative or biosimilar companies at first, the opportunity is there for Teva and their success with Capaxone and Azilectis shows the potential of these new ventures.
ALTERNATIVES (Pros/Cons & Recommendation)
Teva must now decide where they want to take their company in the future. They are faced with several different opportunities and must carefully chose between staying predominantly in the US or to venture to potentially profitable markets such as Germany, France and Japan. They also have the more ambitious option of seriously diversifying into biosimilars, or niche innovative drugs, or both. The main advantage of staying in the US market is the fact that the company has conducted most of its business there over the years and is already an established player in the market. They are good at gaining exclusivity, mass producing and consolidating therefore the easy solution would be to stick with the US generics market and forego ventures in riskier markets.
The problem with this approach is that with such fierce competition in the generics market it is probably not the best choice to put all your eggs in one basket and have to deal with the price erosions and regulatory impasse of the US market. Biosimilars and innovative pharmaceuticals involve more knowledge, more R&D, more lead time and effectively more risk. Although this is a downside, the return associated in these two markets when approached properly can be very high.
Teva is a company that got to where they are by asking a billion dollar question. The answer to that question was taking the US’s generics market by storm, which is by no means an easy task to accomplish. Now they face a crossroads as a company and are in need of another big hairy audacious goal (BHAG) to achieve. I think that Teva’s recent acquisitions show that they are ready and willing to dive into other global generics markets (Ivax), into the biosimilar industry (Sicor), and into innovative pharmaceuticals (Sanofi-Aventis partnering). Many criticize that only few companies can handle all of these operations under one roof but I think with a good related-linked strategy and Teva’s experience from everything political/legal to technical will help them succeed in the expansion of new generics markets and new specialized markets.