Great article on the future of Teva:
globes.co.il
"Copaxone Is Not Viagra"
By Eliav Alaluf
Teva, until not long ago the flagship of
Israel's business world, is proving a
disappointment to investors. The rate of
sale of Teva's multiple sclerosis drug,
Copaxone, did not fulfil initial forecasts;
and in the generic field too, the ever
fiercer competition impinged on the
company's performances. Is management
at fault? Talks with various sources
indicate that the problem lies not with
Teva as a company, but with investors'
and analysts' overly high expectations of
the Copaxone drug.
The truth is, though, that investors couldn't
care less where the blame lies. What they
definitely do want to know, right now, is
when Teva can be expected to emerge
from its crisis and resume its tremendous
growth rate of the past twelve years, with
the share price posting the equivalent of a
20,000% advance. "Manager of the
Decade" Eli Hurvitz is quoted by some
reports as saying that the second half of
1998 will be different, in terms of results,
from the first half. He still pins most of his
hopes on the success of Copaxone's
penetration.
A senior analyst at the Dillon Reed
investment bank published a report in the
middle of last week, containing a Strong
Buy recommendation, and arguing that
the problem with the Teva share is not the
company, but its surrounding uncertainty.
"Globes" accordingly went to Yair
Lapidot, general manager of National
Communications of the Bank Leumi
group, and senior analyst Alon Last, with
a number of questions that many
investors would undoubtedly like to ask.
"Globes": Yair Lapidot, is Teva
capable of producing a blockbuster
that will jump-start its sales?
Lapidot: "At present, Teva appears
incapable of producing a blockbuster. A
blockbuster, by definition, is an ethical
drug sold in a volume of several hundreds
of millions of dollars, sometimes even
billions. One blockbuster drug would be
capable of springing Teva to the big
leagues, like Eli Lilly, Pfizer and other
ethical companies. Teva does not have
the capital to invest in R&D, usually
amounting to hundreds of millions of
dollars, as do the leading ethical drug
companies.
"Building Teva up into an entity capable of
coping with blockbuster drugs on the
scale of Pfizer's Viagra is a complex
strategic task, which will undoubtedly take
a long time. At least for the near future, it
seems, Teva will have to build itself up in
relatively small niches. Which is to say,
Teva must focus on fields defined by the
giants as unattractive, and not operate in
the development of drugs for cancer,
heart disease and suchlike".
Are you saying Teva is incapable of
becoming a global giant?
"Just as Israel cannot be expected to
produce a plane that will beat McDonnell
Douglas, one hardly sees Teva
devastating Eli Lilly. If anything, it would
be a mission for several generations. The
second generation of Copaxone may
prove attractive. If it shows proven MRI
results, can be swallowed rather than
injected, and gets better results than the
present generation, it will be able to
achieve sales of #$300-600 million
annually. The next generation of
Copaxone is not due any time soon, and
nobody knows whether it possesses
those advantages".
Will Teva be able to utilise its
marketing agreement with Biovail to
boost sales?
"In the short term, Biovail has no good
tidings for Teva. For the long term,
however, Biovail is undoubtedly
reinforcing Teva's standing in the generic
field. I am aware that many analysts have
expressed the hope that Teva will be
receiving significant drugs for distribution
in the United States. Meanwhile, it has
obtained approval to distribute one
product - a drug - for improving blood flow
by reducing viscosity.
"The drug is intended for patients whose
limb arteries are chronically blocked. The
ethical version is manufactured by HMR,
which markets Copaxone, and it has an
ethical market of $190 million".
Can Teva improve its position by
breaking into Europe?
"Teva acquired a number of companies in
Europe, including in Hungary and Britain.
These acquisitions represent an initial
foothold in a relatively virgin market, in
terms of the generic field in general and
from Teva's viewpoint in particular. The
generic market is expected to take a long
time to develop, and depends on the
elimination of the branded generic. In
contrast to the United States, today, if you
wish to market a generic drug in Europe,
you must do so under your company's
name.
"In practise, the marketing system
required for marketing generic drugs in
Europe is identical to that required for
marketing ethical drugs in the United
States. Relatively small players such as
Teva, concentrating on the generic
market, do not have the money for it. No
breakthrough is therefore to be expected
in this field in the next few quarters.
"Teva is meanwhile taking steps to
streamline its manufacturing system,
while channelling activities to plants that
have a relative edge in production. This is
a long-term plan that is expected to yield
altogether a $20 million saving by the end
of 1999".
Alon Last, what about the thirteen
applications made to the FDA for
approval to market generic products?
"Approval has been received to market
four products. It should be noted that there
is a difference between FDA approvals
for ANDA products, and provisional
approvals. An ANDA approval means that
the product is a whole generic substitute,
and pharmacists sell it as if it were the
original product.
"Suppose a person goes into a pharmacy
and asks for a certain drug. The
pharmacist may give him a generic
substitute. In this industry, whoever does
an aggressive marketing job and allows
pharmacists bigger discounts - wins".
What does the presence of competing
generic products imply?
"In the generic field, all competing
products are, in effect, equivalent, and
accordingly, the only differentiation is in
the price. Each incoming company offers
lower prices. It is not uncommon to see
cases in which, four months after the
expiry of a patent, the drug price plunges
80%-90%, due to unbridled competition.
Obviously, when prices fall, there is no
chance of high profitability".
Yair Lapidot, is Teva capable of
making brand names of its products?
"The marketing system of Teva-USA is
based on marketing to pharmacists. For
Teva to be able to create itself a brand
name, it will need to invest many tens of
millions of dollars in marketing and
publicity, and there is no assurance that
so doing will result in marketing
differentiation. One hardly sees Teva
taking such a step".
What is Copaxone's potential?
"In January 1997, I warned that Copaxone
was not going to be a hit. In May 1997,
over a year ago, I said in an interview with
"Globes" that Copaxone could reasonably
be expected to reach $150-180 million
sales, in contrast to forecasts put out by
others, of $300-500 million.
"Today, Copaxone is being used by an
estimated 8,000 multiple sclerosis
patients. Copaxone is not Viagra. This is
not a product that provides a total
response to a problem. Copaxone helps
reduce the frequency of multiple sclerosis
attacks by 30%, and that, too, at the price
of a daily injection. Only patients with very
severe cases of multiple sclerosis,
evidently, are prepared to expose
themselves to the suffering involved in
daily injections.
"More than a year ago, I thought that
reducing the frequency of attacks from
one a year to 0.7 a year did not, as far as
a large proportion of potential patients
were concerned, justify the bother of
taking the injections, the side effects and
the price. These things are also true,
however, of competing products. Also,
Teva has yet to present MRI tests, which
will prove the statistical certainty of the
drug. This weakens Copaxone's standing
among neurologists, who regard MRI
results as an unshakeable criterion.
"The improvement in patients' disability
index is also in dispute, and there is also
the threat of the competing product of
Biogen, which posted incontestable
results in MRI tests and which needs to be
injected only once a week. Biogen's
success means pulling the rug out from
under Copaxone.
"In Canada, Copaxone may sell better
than Biogen's parallel product, because
Biogen received approval to market the
drug in Canada only last week, and Teva
thus has the advantage of being first.
Biogen is not yet approved for marketing
in Europe, which means that Copaxone's
potential has not yet been exhausted. But
I revert to the assessment of $150-180
million a year as the probable outcome
over two to three years".
In the past, there was speculation
about a hostile take-over of Teva. Is
such a move possible, in your
opinion?
"A hostile take-over is not impossible, but
is definitely not the most likely possibility.
In fact, I tend to doubt the possibility of
Teva's being acquired at all. The main
reason we are given that a hostile
take-over is impossible is a "poison pill"
mechanism, a delaying device of a
directorial reshuffle. Only one third of the
members of the Board of Directors can
be replaced in any one year, and the
purchaser must therefore wait three years
before achieving absolute control of the
board.
"The main point is that, to this day, we
have not seen any hostile take-over of a
generic company by an ethical company.
Ethical companies do not view the
generic field as an attractive one. Today,
the battle between ethical companies is a
question of who will be first to succeed in
developing a blockbuster. Generic
companies try to develop copies of drugs
whose patent is shortly due to expire. This
means that the nature of the generic
industry is not suited to the management
style of ethical companies.
"The prospects are better, although not
good, for acquisition by some leading
generic company, or some lower league
ethical company.
"As regards Teva specifically, it is not
clear whether the founding nucleus will
waive control in the company. Teva's
strategy is to grow, mainly through
acquisitions, usually by means of shares,
other than when acquiring small
companies. Teva still thinks in terms of
the founders' controlling core, which, in
the United States, is almost irrelevant. It is
not likely, either, that we will see a share
swap deal that will significantly dilute the
founders' share".
In your opinion, has Teva or its
management failed?
"In our opinion, no. This year, due to an
exceptional and unfortunate combination
of circumstances, was one that Teva
would like to forget. In the long term, we
see Teva as a company worth investing
in, but in the short term, we do not expect
any dramatic leap forward".
Published by Israel's Business Arena
July 28, 1998 |
