Thursday, 28 January 2010

When Harry Met Sally: The Propietary/Generic Courtship Continues

I want to add a sequel to my "When Proprietary Harry Met Generic Sally" post of earlier this week, here. The bad news, for all of you who worship this movie icon, is that there is nothing in about what I am about to write that has any connection with Billy Crystal or Meg Ryan. The good news is that, quite by chance, I ran across an article in the Israel business daily, The Marker, entitled "Teva Fires 28 Employees in its Patent and Research Department", the very day after my post. This article well illustrates the dynamic and complex tension taking place at Teva Pharmaceutical Industries, the world's largest generic pharmaceutical company, in its efforts to enter the proprietary drug space.

The gist of the article is that 28 employees were being dismissed from the Teva "patent" department. Most of them were being offered reassignment within the company, with a small number being offered early retirement. A number of students working part-time for the company were also being let go. The article attributed the reason for the down-sizing of the patent department to over-hiring in 2008. More particularly, 50 new employees were added that year, 35 of whom had a Ph.D. degree, thereby doubling the number of staff in the department.

At the time, the move was described as fitting in well with the strategy of the company, "wherein Teva was meant to be increasing its outlay for R&D from 6.2% in 2007 to 7.5% in order to increase sales revenue from $5.2 billion in 2007 to $11.5 billion in 2012. But this strategic goal was, in the words of the article, "rendered irrelevant to some extent" when the company acquired Barr in December 2008 for $7.4 billion here. The result was an overlap of R&D capability between Teva and Barr, which enabled Teva to reduce its R&D budget to less than 6% in 2009. As a consequence, a portion of the R&D staff hired in 2008 "were no longer essential". Hence the downsizing of the department.

I have no special information about the state of Teva's R&D capabilities. Nevertheless, the report does suggest that the company is finding it difficult to ramp up R&D internally in a way that can deliver proprietary products in a way that meets the company's financial goals. Instead, the company seems to prefer to look elsewhere for this, either by licensing-in the technology (which was the secret of its highly successful Copaxone product), or acquiring existing R&D technology. If my observation is correct, it suggests that the transition from generic to proprietary products, as described in A. David Cohen's article, is a challenging exercise for even the most successful of pharmaceutical companies.

In this connection, I am reminded that when Pfizer acquired Wyeth in 2009 here, one of the major reasons given was that Pfizer was interested in acquiring some of Wyeth's R&D capabilities. If Pfizer, which is a proprietary drug company par excellence, sees the strategic benefit of acquiring existing R&D capabilities, what can one say of a generic drug bohemoth like Teva showing a similar tendency. Moreover, I wonder to what extent that decision to downsize has more to do about the short-term company bottom line rather than any long-term plan for sustained proprietary R&D. This consideration, magnified for public companies facing the difficulties of the current economic environment, surely needs to be taken into account whenever one seeks to understand the challenges of moving into proprietary drug activities.

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