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Boycott Hurt Israeli Drug Giant

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    An Israeli Giant In Generic Drugs Faces New Rivals Arab Boycott Gave Teva Edge; Now It s No. 1 in Industry, But U.S. Market Toughens An Army Colonel and CEO By
    Message 1 of 1 , Nov 3, 2004
      An Israeli Giant In Generic Drugs Faces New Rivals

      Arab Boycott Gave Teva Edge;
      Now It's No. 1 in Industry,
      But U.S. Market Toughens
      An Army Colonel and CEO
      Staff Reporter of THE WALL STREET JOURNAL
      October 28, 2004; Page A1

      TEL AVIV -- In 1967, when the Arab boycott was cutting off Israelis
      from many Western drugs, Israel fought back with a new patent law.
      One provision allowed Israeli companies to copy a foreign patent-
      protected drug if the foreign company didn't market it in Israel.

      For Eli Hurvitz, the law meant opportunity. His company, Teva
      Pharmaceutical Industries Ltd., got approval to copy dozens of
      foreign drugs -- and gained expertise in how to do it efficiently
      that few others shared.

      Today, Teva is the world's biggest generic-drug maker and a major
      force in the U.S. market. It fills more prescriptions for Americans
      than any other company except Pfizer Inc. Teva expects revenue of
      about $4.5 billion this year, twice the amount of the next-largest
      generic maker although only a fraction of the more than $52 billion
      in revenue Pfizer expects this year.

      "I used to say that we should thank God for bringing us the Arab
      boycott," says Mr. Hurvitz, who retired as Teva's chief executive in
      2002 after 26 years at the helm. "Without it our company wouldn't

      The boycott is one example of how Israel's tumultuous history has
      shaped Teva from its early days making salt tablets for British
      soldiers serving in the Moroccan desert. The Israeli pharmaceutical
      industry developed as Jewish scientists fleeing Nazi persecution
      emigrated from Europe. Recently, Teva has become a symbol of Israeli
      companies' global ambitions. The government has granted it tax
      breaks to build factories and it is a magnet for Israeli academics
      with ideas for new branded drugs.

      Teva now faces challenges in keeping up its rapid growth because its
      top market, the U.S., is turning tougher for generic drug makers. In
      the U.S., the first generic company to win approval for copying a
      branded drug gets six months of marketing exclusivity -- an
      advantage that traditionally accounts for much of generic companies'
      profits. Now branded companies are fighting back by licensing their
      drugs to "authorized" generics makers or selling their own generics
      through subsidiaries. These tactics cut into the profits the first
      generic reaps in the first six months.

      And competition is growing. India also has a burgeoning generics
      industry expanding into the U.S. that stems from earlier lax
      government rules about copying patented drugs. Indian companies such
      as Ranbaxy Laboratories Ltd., Dr. Reddy's Laboratories Ltd., and
      Cipla Ltd. have lower labor costs and often make their own raw
      materials, just as Teva does.

      Such concerns have helped drive down Teva's shares 25% from their
      June peak, giving the company a market capitalization of about $15
      billion. Investors are also worried about a branded drug Teva sells
      for multiple sclerosis. The drug has been highly successful and sets
      Teva apart from rivals that sell only generics, but a competing
      multiple-sclerosis drug is expected to come on the market in the
      next few months.

      William Fletcher, president of Teva North America, says Teva can
      weather the storm by using its size to strengthen ties with U.S.
      retail pharmacies and other big buyers. Teva offers these customers
      one-stop shopping for generic drugs because its lineup of products
      is so extensive.

      Teva traces its origins to three German Jewish businessmen who
      founded a wholesale drug business in 1901. Based in Jerusalem, then
      a part of the Ottoman Empire, they imported medicines and sold them
      throughout the Middle East. The company name is Hebrew for "nature."
      A merger of Israeli pharmaceutical companies in 1976 created today's
      Teva and brought Mr. Hurvitz to the top job.

      The son of a plasterer, Mr. Hurvitz was drafted as a 16-year-old to
      fight in Israel's 1948 war for independence. Later he began a career
      in pharmaceuticals, starting out washing glassware in the labs.
      Occasionally, he was called up for service in the army, where he
      rose to the rank of colonel.

      By the 1980s, Mr. Hurvitz's strategy of copying foreign drugs was
      proving a big success and he was looking to expand beyond Israel.
      The timing was right. To encourage the use of cheaper generic drugs,
      the U.S. Congress passed the Hatch-Waxman Act in 1984, eliminating
      the requirement for extensive human testing of generics. The law
      allowed generic companies to market drugs if they proved that their
      copies were equivalent to the original drug and convinced a court
      that their products didn't violate any patents.

      To break into the U.S., Teva in 1985 bought a small drug maker in
      rural Pennsylvania. Revenue tripled to $668 million in 1995 from
      $211 million in 1988. But Teva was still a mid-tier player. To lead
      the pack, Mr. Hurvitz and his team decided, Teva would have to go
      global to achieve economies of scale in research and manufacturing.

      The company went on an acquisition spree, buying Biocraft
      Laboratories Inc. of Fair Lawn, N.J., a big maker of generic
      antibiotics, and a Hungarian drug company to gain a foothold in
      Europe. Teva swallowed companies in Canada, Italy, Lithuania and

      Scale matters in generic drugs. If a branded company such as Pfizer
      sells a pill for $2.50, it's not crucial how many pennies each pill
      costs to make. But for generic drugs, which sell for much less,
      every penny per pill spent on manufacturing counts.

      Teva drives down manufacturing costs by producing big volumes of
      popular pills in one place for world-wide sale. At its factory in
      Kfar Saba, Israel, workers in white lab coats tend a large whirring
      tablet-pressing machine for a muscle-relaxant drug. A white granular
      powder is molded into pills that flow down a conveyer belt and are
      sealed in blister packs. Pills are stuffed into boxes along with
      labels printed in Thai.

      Being global allows Teva to start manufacturing generic copies of
      drugs even before they lose patent protection in the U.S. For
      example, the Kfar Saba factory is already making a generic version
      of Merck & Co.'s big-selling anticholesterol drug Zocor even though
      Zocor's U.S. patents don't expire until 2006. Teva sells the pills
      in parts of Europe where Zocor patents have expired. When the U.S.
      market opens, it'll be ready to pounce.

      Once it has done tests showing that its generic drug is equivalent
      to the branded product, it can use the data around the globe. Chief
      Executive Israel Makov says one recent product cost Teva $5 million
      to get ready for sale in the U.S., Europe and Canada but would have
      cost $12 million if all the testing and chemistry had to be redone
      for each market.

      Teva has built one of the broadest portfolios of generic drugs, with
      215 products. Competitors Watson Pharmaceuticals Inc. and Mylan
      Laboratories Inc. sell 154 and 140 prescription drugs, respectively.

      Teva's scale gives it the staying power to outlast the initial burst
      of competition on popular drugs. For example, about 10 generic
      makers started selling the cholesterol-lowering drug Lopid, known
      generically as gemfibrozil, in 1993. Today, only three do, and Teva
      is one of them. Teva declined to comment on pricing in this case,
      but typically as competition shrinks prices go up.

      "Be first, stay last," says Mr. Fletcher, the Teva North America

      Analysts worry, however, that growing competition will make it
      harder for Teva and other leading generic makers to keep prices up.
      Some executives say wholesalers and retail drugstore chains are
      driving harder bargains on generic drugs as their choices widen. Mr.
      Fletcher says the business is no more cutthroat than it's always
      been, and he believes Teva can stay ahead by continuing to expand
      its product line and keeping manufacturing costs low.

      Banc of America Securities analyst David Maris agrees, even though
      he frequently warns of pricing pressures. Mr. Maris likens Teva to
      a "nicer house in a bad neighborhood." Jeffrey Herzfeld, who manages
      generic drugs for the big U.S. wholesaler McKesson Corp., calls
      Teva "a clear industry leader." In a volatile field where product
      decisions hang on complex litigation, Teva's managers "are very
      attuned to what's going on, and they are right more times than
      wrong," he says.

      U.S. generics makers tend to be scrappy upstarts with short
      histories and sometimes-rapid turnover. At Teva, many employees have
      been around for decades. The company has a paternalistic streak that
      would be more familiar at a long-established European company. It
      pays the tab for employees' vacations and subsidizes their
      children's educations. The children even get a Teva bag to carry to

      Last month, the company threw a Jewish New Year party for workers at
      its Jerusalem plant, as it does every year. As a violinist and a
      flutist played lively klezmer music, the workers dipped apple slices
      in honey, a tradition ushering in a sweet New Year. They ate red
      pomegranate slices in the hope the year would bring as much
      prosperity as the kernels dotting the fruit.

      Teva has one of the biggest global presences of any Israeli company,
      and at home Mr. Hurvitz is a business celebrity a la Bill
      Gates. "Every Jewish mother wants her son to work at Teva," says Dan
      Suesskind, the chief financial officer, who has been at Teva since

      In part because of the isolation that spawned its generics business,
      Teva chose to make its own raw materials. Now it sees this ability
      as an edge over competitors such as Watson and Mylan, which prefer
      to buy from outside suppliers. Teva makes about half of its own
      active ingredients and also sells them to many competitors.

      The recent race to market a generic version of Pfizer's $2.7 billion-
      a-year epilepsy and pain drug Neurontin shows how Teva's raw-
      materials capacity can give it an edge. A small generic maker,
      Alpharma Inc., was the first in line with generic Neurontin and won
      the coveted six-month exclusivity period from the Food and Drug
      Administration. Alpharma started selling the generic on Oct. 8, but
      Teva is still taking a slice of the profits because it sells the raw
      materials to Alpharma and extracted a high price for them. While
      Alpharma could have switched suppliers, it would have had to rewrite
      its application to the FDA, causing delays.

      Although Teva's Mr. Makov wouldn't disclose specifics on Neurontin,
      he estimated that in such situations, Teva grabs 20%-50% of the
      profits from the exclusive period of sales.

      The Neurontin case also demonstrates Teva's willingness to use the
      same bare-knuckled tactics as branded companies to protect its
      position. Teva obtained patents on its own formulation of
      Neurontin's active ingredient and its manufacturing process. So if a
      generics maker buys the active ingredient from another supplier it
      risks running afoul of Teva's patents. One generics company, Apotex
      Inc., started out using Teva's active ingredient but switched
      suppliers to get a better price. Teva then sued Apotex for patent

      Teva's close ties with the Israeli scientific community brought it
      Copaxone, a branded multiple-sclerosis drug that it has sold in the
      U.S. since 1997. The compound was discovered in 1967 by a scientist
      at the Weizmann Institute of Science, the research center founded by
      Israel's first president, who was also a chemist. Immunologist
      Michael Sela made a compound that seemed to reverse induced
      paralysis in laboratory guinea pigs, and wondered if it would help
      the paralysis of multiple-sclerosis patients.

      He called Mr. Hurvitz, a friend for years. "I have something I want
      to show you," Dr. Sela told him. Mr. Hurvitz invited the scientist
      and his wife to dinner at his home. Dr. Sela used a slide projector
      to show the data on the drug's early success. "I want it," Mr.
      Hurvitz said.

      In 1996, Copaxone became the first Israeli drug approved by the FDA.
      The drug had world-wide revenue of $720 million last year, which
      Teva splits with its marketing partner, Aventis SA (now part of
      Sanofi-Aventis SA). Gregory Gilbert, an analyst at Merrill Lynch,
      estimates that Copaxone accounts for 16% of Teva's profits. Teva
      doesn't release that figure.

      For Teva, a big danger ahead is Antegren, a multiple-sclerosis drug
      being developed by Elan Corp. and Biogen Idec Inc., which many
      analysts expect to capture a chunk of Copaxone's market share.

      Teva's application to market a new Parkinson's drug, Agilect, is
      under review by U.S. and European regulators. Teva has about 10
      drugs in early and midstage clinical trials, including treatments
      for Alzheimer's disease, multiple sclerosis, and lupus. But unlike
      other generic drug companies, which hanker after the big profits of
      branded drugs, Teva executives say they want the company to continue
      to be primarily a generics maker. That will keep it exposed to the
      risk that already-low profit margins will get even lower.

      Favorable tax policies in Israel boost Teva's profits. The Israeli
      government offered Teva tax breaks to persuade it to build an $80
      million facility in the hills just north of Jerusalem. The plant
      should be completed by mid-2005. Teva won't pay any tax on the
      profits generated by the plant for 10 years. Teva paid an average
      tax rate of 21% on its 2003 pretax income of $872.5 million compared
      with 35% for U.S.-based Mylan, which had pretax income of $513

      Write to Leila Abboud at leila.abboud@...1

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