Teva (3-07): Making a Foray into Biogenerics?
Thursday March 22, 6:12 am ET
>>> Shlomo Greenberg submits: Six months ago, I received two interesting articles on developments in the generics sector. Not the one with which we are all familiar from the activity of Teva Pharmaceutical Industries Ltd. (NasdaqGS: TEVA), but the generic biotechnology sector which many view as the medical industry's new, mega niche.
One of the articles I received was taken from CNN Money.com entitled "Missing the 20 billion Bio-generic boom," and was written by its staff writer Aaron Smith. The other was taken from the "Boston Globe." The CNN article opened with the sentence, " A huge new industry - biogenerics - is waiting to be born," and then went on to say that the companies leading the entry into this field are Barr Pharmaceuticals Inc. (NYSE: BRL - News), and Teva Pharmaceutical Industries Ltd. (NasdaqGS: TEVA).
The article in the "Boston Globe" talked about a lawsuit that was filed against the U.S. Food and Drug Administration (FDA) in a matter relating to generic biotechnology. Steven Heuser, the "Boston Globe" economic affairs correspondent, said that although it will take some time until patients in the U.S. get biotechnological drugs at generic prices, the process is already in full swing.
The development of the generic biotechnology niche is not a simple process and certainly not an easy one. This generic industry has enemies that wield tremendous power, from leading companies such as Amgen Inc. (NasdaqGS: AMGN), Genentech Inc. (NYSE: DNA - News) and others that are unwilling to surrender their gold mine, to authorities that are in no rush to promote the issue because of the lobbying by companies like these, as well as the fact that this process is difficult and extremely expensive.
Last summer Novartis AG's (NYSE: NVS - News) Sandoz division filed a lawsuit against the FDA in the District Court for the District of Columbia for what it described as feet dragging for more than two years on a biotechnology drug called OmniTrope, which serves as a substitute for human hormone growth. The judge hearing the case, Ricardo Urbina, sent a scathing letter to the FDA in which he demanded an immediate explanation to the court and Sandoz. But the problems didn't begin with this lawsuit. As early as 1984, when the biotechnology industry was still in its infancy, the then Congressman Henry Waxman (Dem, California) introduced a law that paved the way for the registration of generic drugs in this field. Last summer, 22 years later, the same congressman announced that he would be redrafting the law to make it clearer and stricter, since, as he put it, "there is no pathway for approving low-cost competing versions of drugs, even after patents have expired," which would be of benefit to the public.
In his article on CNN Money, Aaron Smith claims that the bio-pharmacological generic industry is in its nine month of pregnancy, and he wonders when will it be time and who will be the midwife. The biotechnological industry is, as it happens, now 30 years old. One of the pioneers of this industry was Genentech which was founded in 1975 and floated in 1982. It was followed in 1980 by Amgen, which over time, became the Pfizer of the biotechnology industry. Europe and Japan started out even earlier than the US, with companies like Novartis, Serono and others entering the field as far back as the late 1960s.
To be perfectly honest, after studying the issue, I found it extremely difficult to determine exactly which is the leading biotech company today. Novartis, for example, which has sales of around $37 billion, is active in all fields. Its sales of traditional generic drugs are believed to be more or less the same as those of Teva, meaning around $9 billion. What proportion of this is pharmacological products and what is biotechnology products is unclear to me. Amgen, which has sales totaling $15 billion and Genentech, whose sales total $10 billion, sell nothing but biotechnology products. But one cannot ignore companies such as Johnson & Johnson (NYSE: JNJ - News), and GlaxoSmithKline plc (NYSE: GSK - News), two of the world's largest medical companies, which are also active in the biotechnology niche.
In his article, Smith quoted WR Hambrecht analyst Andrew Forman who claimed that Teva is already capable of producing biogenerics overseas. "Investors are being incredibly myopic if they can't recognize the potential for Teva's biogeneric market in the U.S.," he said, adding that by 2010 some $20 billion worth of biogenerics will begin to become available. Smith added that Barr could be a competitor to Teva, especially if it went ahead with the acquisition of Croatian biotechnology company, Pliva (which it eventually did).
I have always believed (and I have said as much in my columns in recent years), that the two most serious contenders in the new and expanding field are Teva and Novartis, although Teva has considerable advantages that put it ahead of all the others. In keeping with a practice set down by chairman Eli Hurvitz, a practice which outgoing CEO Israel Makov continued vigorously, Teva operates on the basis of long-term strategies, and since the turn of the century, it has devoted an increasing amount of resources to this field. It started with the acquisition of Californian company, Sicor.
Teva does not make a public fanfare about it, but I have no doubt that not only is it one of the driving forces promoting the issue with the FDA and legislators in the U.S., but it is also working on the assumption that the field is set to be thrown open in the near future. The acquisition of Ivax could, perhaps, also be part of this strategy, since Teva is the company with the most experience in regular generics, and it is a company that is well connected with knowledge sources. Moreover, it has proven R&D capabilities, and it has an experienced marketing network for its generic product lines. It is because of all this that I believe that Teva will make the transition to biotechnology generics much faster than all its competitors.
Does all this constitute a reason to go out and buy Teva shares? Maybe. It is certainly no reason to sell them, but it could perhaps be a bit too early to buy on the basis of this, given that the timeline for the transition is not yet clear. The only thing that concerns me is still the uneasy feeling that I have had about the replacement of Israel Makov with Shlomo Yanai. I find it difficult to fathom out what's happening there, and I very much hope that both Hurvitz and Makov will help the new company CEO and that the entire management will give him its backing, otherwise my entire theory will go down the tube. <<<
