Teva Explores The Common Ground Of Follow-On And Innovative Pharma
By Wayne Koberstein, Executive Editor
An instructive view of Israel’s global powerhouse in traditional pharma, generics, and “special generics” at a critical time for the company and its leader
No other company could reproduce the unique history and market range of this one; the circumstances of Teva’s birth and growth have been as entirely novel as its location at the commercial crossroads of Europe, Africa, and Asia. Current headlines suggest the scope of its story — everything from closed plants and massive layoffs to executive compensation “secrets” and a key patent expiration — yet the reports shed little light on the company’s inner workings and new management thinking. Teva was relatively new on the scene in North America at the turn of the millennium, when I had already been covering the industry for 15 years. To many, it was the company that appeared in the top 20 pharma lists seemingly overnight.
It speaks volumes that Teva, which first grew large selling and manufacturing drugs other companies had introduced, will now be judged on how well it survives a key-product patent expiration. Fortunately, the company has since pioneered new ground that encompasses both sides of the old follow-on and innovator dichotomy. The same wave of patent expirations that threatens Teva, as it does most Big Pharmas, brings many new opportunities to this uniquely diverse company. Teva has also appointed new president and CEO Jeremy Levin, a physician and innovative pharma veteran. Levin explains the company’s future lies not in producing more traditional, “Paragraph IV” generics, but “high-value generics” and innovative treatments in CNS, respiratory, and other areas. Teva is expanding its OTC products in a joint venture with P&G, and it is applying the Teva-coined, but now more widely adopted concept of “new therapeutic entities” (NTEs) — novel formulations or combinations of existing drugs designed to improve compliance and, hence, patient health.
Most of the press coverage on Teva has focused on whether it will find new drugs to replace older products in its branded portfolio. But here we look more closely at the company’s strategy for dealing with a much greater and comprehensive set of changes in business and healthcare.
GROWING BY LEAPS
Levin spoke with me by phone from the company’s headquarters in Petah Tikva, modern Israel’s first new town, after responding to my July 2013 article, “GDUFA Sheds Light on Industry’s Common Ground.” In his initial note, he said, “I was particularly struck by the convergence that you described and, indeed, the thinking which articulates some (but not all) of the conceptual underpinning for Teva’s transformation. At the end of the day, there is one clear imperative — the production and provision of superbly high-quality and effective medicines.” Teva’s “transformation” into an originator company is actually the latest in a long history of seismic changes the company has undergone since its founding 110 years ago.
Teva’s first original product to go global was Copaxone (glatiramer acetate) for multiple sclerosis (MS), launched in 1996. Copaxone may lose IP protection as soon as May 2014, and the company also faces patent losses on other branded products it markets. Levin, who joined the company as CEO in May 2012, has been under pressure from analysts and shareholders to boost the pipeline and cut costs simultaneously, speeding up the one while deepening the other. They would like to see him repeat his celebrated “string of pearls” strategy at Bristol-Myers Squibb, bringing in new products through partnering and acquisitions.
Though seemingly two different issues — industry’s innovator- generics convergence and Teva’s against-the-odds growth strategy — a common challenge unites them. Put simply, the industry and Teva have met at the crossroads of medical need and industrial invention. In Teva, you can see the industry’s uphill struggle to bring new therapeutics into the world that help patients and give vitality to the enterprises that develop and supply them. And you can see the wide range of approaches this company is taking to meet its humanitarian and business challenges.
Levin gives positive credit to conventional generics for greatly widening patient access to critical medicines and lowering the cost of care. He views low prices as a key benefit of follow-on medicines and the original Paragraph IV process — by which generics makers must seek to invalidate originators’ patents — as a necessary, even heroic mechanism for healthcare progress.
“America’s pharmaceutical landscape was historically driven by large, high-priced drugs. Companies that introduced generics were not well-thought-of, and the large pharmaceutical companies battled against them. But in effect, the penetration of generics was initially very minimal,” he says. “Now it’s 83 percent, and generics have had a huge, multibillion-dollar effect in reducing healthcare costs. Today, generics are part of our life, and they will be forever.”
Indeed, that seems to be the case — even if generics will not forever be the same. Levin says two main developments are forcing changes in the generics business model: greater challenges with the character and reproducibility of molecules coming off patent, and a steep decline in the value of Paragraph IV products, with dozens of companies now typically sharing marketing exclusivity for a single drug.
Both factors encourage the emergence of “high-value” generics, follow-on versions of complex medicines, and improved versions of standard medicines. Complex generics — such as injectable, liposomal, long-acting release, nasal, patch or device-delivered drugs — present real development challenges, Levin says, because it may be difficult to engineer the optimized molecule, formulate the API, or overcome other technological barriers. An essential ingredient of the new business model he describes is a company’s ability to develop and manufacture complex and special products in a broad variety of types and at a scale sufficient to keep costs for company and customers as low as possible.
“Whether it’s a simple generic or a complex one, high-value or otherwise, integrated generics companies like Teva are all working toward the same end — we’re all basically bringing greater competition that will ultimately lead to more patient access for critical medicines,” Levin says, in what he calls his “apple pie” statement. His main point highlights an objective change in the pharmaceutical/biopharmaceutical business model: Products will no longer compete only upon price, in generics’ case, or upon first-to-market in the case of the original patent holders, but also upon finished-unit quality.
Levin cites Teva’s “capabilities in formulation” as one of the areas where it has stepped ahead of traditional pharma in manufacturing. Advanced formulation allows the company to explore a nontraditional but medically needed form of innovation. Rather than drawing on drug discovery, it puts products through a rebirth. Its NTEs, siting on proven targets with known efficacy and safety profiles, improve on the original products with optimized formulations, new delivery technology, or even repurposed applications to address unmet patient needs.
The company’s first initiated NTE project deals with HIV, where it aims to improve adherence by significantly reducing the pill burden for patients. Other targets of Teva’s NTE focus include prolongation of drug half-life to reduce frequency of administration, modification of pharmacokinetic profiles to reduce side effects, converting drugs from parenteral to oral or other favorable routes of administration, drug delivery systems for special patient populations, such as children and the elderly, and drugs developed for new indications. “The model of the future is managing complexity; we can create better and better medicines which improve compliance, rather than relying on small Paragraph IV products.”
So, does the new model predict the demise of the traditional mom-and-pop generics company that plowed the first ground in this field? “I believe the integrated strategy is the one that is required,” says Levin. “Some individual companies will be able to produce a single product at a very low cost because that’s all they do. The question is, will they be able to deliver high quality at the high volumes the FDA and customers demand, and can they ever do a high-complex product? It will depend on their ability to finance quality capabilities to support FDA regulations, whether they produce in the United States or import from foreign countries — that will be an essential requirement of all great producers of medicines in the future.”
Teva’s entry into specialty pharma also begs the question of whether smaller specialty companies will survive the competition from larger players. “Specialty companies have a very important role. Small companies and large companies can now explore alternative forms and uses of medicines in a way that hasn’t happened before. But Teva’s approach to specialty products is industrial scale. You need to produce them consistently and in an industrial fashion. Then you can select them from an array of choices in your armamentarium based on whether you’ll get a reasonable return, have the technological capability to produce them, and know they’ll benefit patients and payers.”
Levin says the company has a system for selecting and assembling a portfolio of drugs and advancing them through NTE development. It has promised to deliver 10 NTEs into the pipeline every year and, he says, will end this year well ahead of that number. “Our pipeline includes some potential blockbusters, in terms of both their value to us and their value to patients. Success in meeting our targets for the number of new pipeline projects we add each year will rapidly build a multibillion- dollar opportunity for the company, by virtue of having many different products that we know are successful, we know their pharmacological capabilities, and we know what they do for patients.”
COST CONSCIOUSNESS, FLOOR TO CEILING
With all the talk about high-value, complex, and special generics, it is fair to wonder whether the sector could move away from its original cost-saving mission. Is this a bit like new cancer medicines, vaccines, and orphan drugs growing in sophistication but with price tags that empty pocketbooks and strain payer budgets?
Levin’s answer is an unequivocal no. “That is why a large fundamental capability is important,” he says. “You cannot raise the cost, developing more and more complex products at higher and higher prices. You must maintain access at the most affordable prices. If you don’t do that, you run into a major problem. That’s why I believe that scale matters. Scale matters a lot.”
In addition to scale, Teva epitomizes the aggressive adoption of advanced manufacturing technologies now gaining momentum among generic drug producers to ensure product quality and gain efficiency. Levin believes the generics industry is catching up with Big Pharma on the manufacturing front and, in Teva’s case, often surpassing it.
“The standards and capabilities and skills inherent in a pharmaceutical operation are now the same ones required for generics — and this is all to the good,” Levin says. “I view Teva as a natural partner of the pharmaceutical base because we manufacture.”
Everything said so far about branded or originator versus generic medicines applies mainly to only one market, albeit a large one, the United States. Travel outside its borders, and the clear distinction between the two nearly fades away. So when I ask Levin whether the Big Pharma execs still give his company the cold shoulder over its generic roots, although the company’s business is far broader now, his response reflects a much larger, global, and historical picture of the dichotomy.
“The original antagonism that existed between the pharmaceutical industry and the generic industry was based on directly competing business models. The pharmaceutical industry had every interest to protect their franchises, whereas the generics companies were specifically attacking those franchises. But for Teva, and from my point of view, our interests have become more and more intertwined. The lack of sustainable franchises and the social pressure around healthcare economics in the United States gave us one enormous shared interest — to retain public confidence in our medicines across the board. Having spoken to the more thoughtful leaders in the pharmaceutical industry, I believe we are seeing a convergence.”
TEVA’S TEAM RESHAPES
Tooling up for its innovation initiatives has affected more than technology at Teva. According to Levin, operations and management structures have taken on new shapes to execute the new strategies.
“We globalize certain functions such as compliance, finance, legal, procurement, and R&D. We’ve also globalized our whole specialty medicine franchise and capabilities, but we’ve stayed local where local matters, with local commercial capabilities in different countries, and we’ve stayed regional where it’s important. The United States is one big market, but once you get to Europe, you’re dealing with tens of different markets and many different kinds of players.”
Although Teva went through a long period of growth by acquisition, Levin says those days are over. “I am convinced the only sustainable way to grow is through internal growth — organic growth driven by great products. Targeted acquisitions can supplement that, say, to help build a portfolio in a key therapeutic area or to enter a new country, but they should not have the main role for growth in the future.”
The “constellation strategy” is the term coined for Teva’s supplemented organic growth approach, as Levin explains. “We weave together transactions, small acquisitions, internal programs, and alliances with other companies to create a strong arena where we will see growth in our core area of respiratory or in our core area of CNS.”
Outsourcing has limits as well. Levin says the company aggressively searches for suppliers that satisfy two criteria: “They can do it better than us, and they can do it cheaper. But they must start with the better. I want high-quality outsourced capabilities across the board.” He says the company does about $9 billion in procurement of outsourced programs per year, “and we’ve hired some of the best procurement people in the world to do it.” Teva has brought in outside experts in manufacturing, especially in quality assurance and control.
A GROUNDED STRATEGY
Outside the company, opinions about Teva’s future remain mixed. If you concentrate on the branded side of the industry or otherwise don’t buy the argument that highvalue generics can share the playing field with patented originals, you’ll keep looking for the company to pull a mega-blockbuster out of the hat. If your focus is generics, you have more to hope for in Teva.
Analysts who have looked beyond the company’s IP predicament or blockbuster potential generally give it high marks for basic soundness and steady growth, with a wealth of products and a thriving API business. If I were an analyst, I would render an opinion one way or the other. But I’m not.
“Observers say we are focused on the right things, but want to see how the strategy unfolds,” Levin adds. “In today’s world, we will seek solutions that rely on telemedicine — smart devices, smart diagnostics — and integrate them into one total picture of care. The new team at Teva is aiming for cures to diseases not yet curable, solutions that make quality of life better, and therapies that leverage our understanding of genetics and can slow down the progression of diseases like Huntington’s.”
A key growth driver will be the NTE strategy, which has shown early success but is not yet proven on the industrial scale that Teva is planning. Other major drivers include emerging business areas like consumer health and a stronger footprint in new markets. Levin is still relatively new to the company, and he is still proving himself as a CEO. He has not yet revealed his full strategy as the company adapts its portfolio to the changes in the healthcare market.
One of the most interesting aspects of this story is the dramatic tension of a company in transition, largely into unknown territory and against fluctuating odds. Although that unexplored region may be the industry’s most promising common ground, where the branded and generic businesses converge, it now seems wild, untamed, and excitingly unpredictable.
CROSSROADS OF COMMERCE OVER CONFLICT
Teva’s relatively new CEO Jeremy Levin gives a telling account of the company’s unique history and geographic position:
“Teva is a good global citizen, primarily because we’re at the crossroads of Asia, Africa and Europe. Our HQ is 185 miles away from Africa [Egypt] and 210 miles away from Europe [Cyprus]. So, the company has unique perspective and composition, and its history is a history of evolutionary change every 10 years or so. It starts about 110 years ago, in Jerusalem, before the Turkish Empire ended, with a small pharmacy and people shipping medicines by camel up to Jerusalem from the ancient Port of Jaffa. Fast-forward to the end of the British mandate in 1948, when suddenly Teva is in the midst of the war of independence of Israel. It becomes a manufacturer and supplier of medicines to many of the British nationals, but really providing medicines to all the people in Palestine. Then it went forward from being a manufacturer to being a consolidator of local medicines and bought one of the companies locally.
“By the mid-sixties, Teva was a strong company with a good solid local practice of medicines and manufacturing. But about 1967, many of the global companies began to license their products to Teva to sell in Israel, and did so in large volume. Teva became not just a manufacturer of drugs, but also a conveyor of new medicines from the West into Israel, and it rapidly became the largest medicine company in Israel; again, a complete change from the previous business plan. The company leaders started to think about how it could expand beyond its boarders, with penetration into Europe and America.
“Then something quite remarkable happened. One, with the advent of the Hatch Waxman Act, they became convinced that the Paragraph 4 presented a very large opportunity; and two, Teva R&D became very close with the Weizmann Institute of Science in Rehovot, Israel, and the company agreed to fund the novel medicine Weizmann scientists discovered for multiple sclerosis [Copaxone]. So Teva became a much different kind of business once again. During the next couple of decades, the company was fueled by tremendous cash flow from Paragraph 4 producers and, at the same time, the steady, significant growth of Copaxone. The cash allowed them then to buy companies and expand rapidly in a very exciting fashion across the world — America, Europe, and Asia — through acquisitions.
“But those two economic engines, like all of these things in the pharmaceutical industry, began to wane. The Paragraph 4 exclusivity effectively disappeared; instead of one company having exclusivity, 10 or 12 companies own it together, lowering its value from hundreds of millions to tens of millions of dollars. So the leaders began to think about how they could diversify Teva’s capabilities in specialty medicine. And that’s when, again, the entire focus of the company changes.
“This company is one steeped in a history of change, opportunism, and — something unusual in the generics business — leadership. The very DNA of this company is to seek opportunities that others have never done before, to take them on, and to become a leader — a very different kind of mentality from other generics companies or companies focused on one blockbuster.
“It is important to remember that today Teva holds the most important position in patients’ medicine cabinets as the largest producer of medicines in the world. But it’s not just about becoming number one; it’s that in doing so, Teva helped transform the healthcare landscape.”