Daniel Brownstein Dr Subramanian - Management 580 10/31/2011 Mid Term Exam Exam Questions 1.

Examine the key strengths of Teva Pharmaceuticals (Hint: a good approach to this would be to identify 1-2 resources/capabilities and analyze them) Teva Pharmaceuticals has a number of resources and capabilities that have helped it to establish a stronghold on the generic pharmaceutical industry. The first capability that has helped Teva establish itself as the top player in generics is that it has somehow found a way to develop generic drugs and an incredibly low cost. Although Margins are not quite as lucrative in the generics arena as they are for competing innovative pharmaceutical companies, Teva has found a way to earn almost 20% in net income. This is quite the anomaly because Generics are typically priced lower than the original versions, therefore giving less revenue to make margin. Teva not only provides over 240 generic drugs, they also provide services like inventory management, and they are able to offer an unmatched output. By having such control and vertical integration in the industry it has complete control over the quality of its products. Teva has always been a cost leader and that has enabled them to take a significant amount of market share in most of the worlds largest markets. Teva has continually guaranteed the lowest price to their customers, and has repeatedly undercut any competitor who has challenged their position in a give market. They have shown an aggressive stance in keeping market share with a whatever it takes attitude, and bullying competitors who cant offer products at the same price due to lack of scale or overhead. By scaling up and acquiring companies all over the world one would think that this might impose a great challenge to Tevas management on how to utilize and create synergies amongst these acquisitions to reduce overhead. By initially limiting its growth to the US and Israel, and easing its way into

new markets through acquiring homegrown brands Teva has maintained a low cost culture, and achieved scale advantages that can not be matched by other companies. If they do not defend this position, and continually evolve ways to sustain their competitive advantage and innovation by investing in technology and processes, they may see their market share decrease in the near future. The second major resource that Teva has at its disposal is the utilization of some of the best human resources in the world. They have repeatedly found ways to collaborate with scientific institutions in Israel, such as the Weizmann Institute, Hebrew University of Jerusalem, or the Technion. Tevas strong relationship with Israeli academic institution has yielded 150-180 proposals for new drugs per year and it has relied on these institutions to use their overhead for drug discovery. In addition, for decades Israel has been the destination for many of the worlds best scientists and engineers who have been made to flea their homelands. From its inception Teva has built a reputation for successful merges and fair treatment of employees. It has continually felt that the consequences of treating employees poorly could devastate them and it is deeply reflected the values of Eli Hurvitz. By establishing a tone at the top and an optimistic work ethic as referenced by Hurvitzs Billion Dollar Theory. Hurvitz has always looked for efficiencies and synergies within the business and has refrained from outsourcing all of Tevas manufacturing because labor is not the only input. Employees in Israel are much more productive and capital intensive. For the most intensive processes they have outsourced productions to India. As Teva has continually acquired many corporations it has also continually reconfigured its supply chain after every major

acquisition so that it can fully take advantage and streamline its business processes to maximize efficiencies. 2. How sustainable is Tevas leadership position in generics? What are possible threats to its competitive advantage? As Teva has grown and invested in sizeable acquisitions such as Ivax, and Sicor it has been able to pay a discount for quality companies. By driving deals and being savvy with capital it has enabled Teva to improve its market share and positioning with every acquisition. I do believe that Tevas leadership position in generics is sustainable due to their low overhead, and namely their ability to keep selling, general, and administrative costs near 15% of net sales (15-20% below most competitors their size). If they are able to sustain their cost structure and low overhead they should also retain their growth. Daniel Vasella, the CEO of Novartis, has predicted that the international generics market will double from $52B in 2005 to $100B in 2010, leaving plenty of room for Teva to enhance their presence internationally. Teva has also been extremely successful in forming alliances to exploit exclusivity through the Paragraph IV provision. The Paragraph IV provision is an exclusivity period that sets up a highly coveted duopoly for the first six months after the introduction of a generic drug. Over the past decade Teva has filed and won the most excluvities in the industry earning a reputation for quick accurate filings and aggressive patent litigation. IF Teva is going to sustain its position as the market leader sustaining and defending this position by investing and training employees how to be the best at filing and patent litigation is integral. From 2004 to 2006 Teva had filed 24 paragraph IV challenges compared to just 8 of its biggest competitor Sandoz. Teva also has to continue to build a deep pipeline in the US as well as other developed countries. In order to

defend their global market share Teva should focus on generics in large potential markets that are gradually opening up, such as Germany, France, Japan, South-east Asia, and Latin America. While pharmaceutical prices have eroded over time this is only going to benefit Teva as there are few competitors who can compete on their level of scale and cost effectiveness. Teva has threats coming from all angles and many competitors. Unfortunately for Teva other large pharmaceutical companies who have traditionally dealt with innovative drugs have seen the profitability and stability in the generic drugs industry and have started investing and acquiring generic manufacturers to compete with Teva. These firms have used aggressive tactics and since they also posses similar scale to Teva they pose a credible threat to growth opportunities. Pharmaceutical research is an inherently highrisk activity for these innovative companies, although it produces very high margins. This coupled with rising drug development costs and the average cost of $800M to bring a drug to market has made innovative firms seek stability that can be achieved from the generics industry. Another tactic to cut into generics manufacturers margins is the efforts by innovative firms to release their own authorized generic versions of their products during the six-month exclusivity period and collecting a licensing fee for production rights from competing generics companies. Also, starting in the 90s the generics industry has experienced entrance of new types of competitors. Low cost competitors such as Ranbaxy, from India, and Eastern European companies have emerged virtually duplicating Tevas methodologies and trying to compete on cost of generics. With fierce domestic competition and low consumer ability to pay Ranbaxy was forced to have a low cost and overhead structure.

Once Ranbaxy was able to emerge internationally they solidified the second largest generics pipeline in the US, only to Teva. Ranbaxy has the ability to achieve a similar scale to Teva over the next decade and can potentially squeeze out some of their market share. 3. Consider the choices facing Teva Pharmaceuticals at the end of the case go international, get into biosimilars, Etc. What should the company do? (Hint: a good approach would be to go back to the resources capabilities identified in Q1 and see which ones transfer best to each strategic option considered.) Teva will continue to be successful so long as they stay true to their core competency and dynamic strategic management style of maintaining cost leadership. By having low fixed overheads and increasing revenues through scale and distribution channels Teva will solidify their market leadership position in global generics. Teva can increase their pipeline by forming alliances with innovative companies for exclusivity of generic forms of blockbuster drugs. Since innovative firms are attempting to penetrate the generics sector, Teva will have to maintain their low cost structure to protect their profitability. Another way to increase their international presence would be to find a way to distribute selectively in Germany and France with low overhead. Germany and France have a different network of supply chain where doctors directly give products to patients rather than patients going to pharmacies. By targeting only the largest practices in France and Germany this can give Teva presence in two of the largest generics markets in the world without overextending overhead and employing a large sales team. In addition to France and Germany, there are developing markets in Russia, China, and Eastern Europe where generics could prove to have a large growth potential and market penetration in the years to come.

My recommendation for Teva would be to venture into the quickly expanding market of biosimilars. There is a multibillion industry for biosimilars and it is largely underdeveloped. The active compounds found in these drugs are extremely complex that were very hard to duplicate. The expected rewards in biosimmilars are high and the prices of the drugs are expected to be discounted only 10-20%. Biosimmilars are expected to achieve margins that are very close to innovative products even though they are generics. This is the prefect speculation for Teva because of their expertise and capital will enable them to pioneer biotech drugs and cultivate these products at a low price on a large scale without much competition. Teva has repeatedly exercised excellent negotiation skills and purchased valuable assets and companies at a discount. They have rarely paid a premium to scale up and they have been able to increase their market share through bargain shopping some of the worlds largest corporations that just needed a slight adjustment in managerial structure and practice. They became the most active acquirer in the industry sometimes paying less than one times sales for a target company and rigorously executing the integration to utilize their vertical integration. Lastly, Teva should continue to utilize its relationships with Israels top educational institutions. By working closely with these institution rather than moving R&D internally they have been able to critically watch their expenditures and increase profitability. An added benefit is that Teva will benefit from an enlarged talent pool in which their human resources professionals will be able to recruit personnel from these institutions. By strategically creating alliances with these universities Teva has reduced their risk exposure and have opened themselves to many business opportunities. Teva

has also been hesitant to take on costly projects alone and will instead share the liability in partnering with a start up venture that may have a breakthrough blockbuster product. By creating these partnerships they have limited their liabilities and exposure, while enabling themselves to scatter their resources amongst many different ventures.