When a company's future is caught in the generic drug/proprietary drug crosshairs

There is nothing in any other IP regime analogous to the generic/proprietary divide with respect to the exploitation of patent rights in the pharmaceutical industry. The relatively short period of patent protection, 25 years at the most, in light of the multi-generational staying power of some drugs, means that there is potentially big business in commercially exploiting the public domain after a drug has come off patent. Add to this the symbiotic relationship between proprietary and generic products; without the patent protection undergirding the former, the latter would never come to be.

While a first view of the proprietary/ generic landscape might lead one to think that it is a zero-sum game, i.e., a company that is engaged in

proprietary products will not also be involved in the generic market, and vice versa, the commercial reality is much more complex and nuanced. There is no pharmaceutical company that better reflects the challenges of trying to master both these product markets than the Israeli-based company, Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) Thus, while it is often said that Teva is the world’s largest generic drug company, its most successful product over recent years has been the proprietary drug for multiple sclerosis, COPAXONE, reportedly amounting to 35% of profits. This reminds us how a basket of generic drug products can be barbelled by a single proprietary blockbuster.

The problem for Teva is that COPAXONE is coming off patent. Add to this a lackluster track record of acquisitions and general pressures from competitors in the generic space, culminating in the failure of its multi-billion dollar acquisition of the Mexican company, Rimsa. This is before President-elect Trump's comments yesterday on drug prices and manufacture abroad, as reported by fellow blogger, Mike Mireles. It is no surprise, perhaps, that Teva’s shares have continued to tumble.

Against this backdrop, the interview given by Teva activist shareholder Benny Landa is an illuminating window through which to view the challenges facing this mid-sized, proprietary cum generic drug company, with a bit more than $20 billion in sales per annum. Landa is an iconic figure within the Israel high-tech scene, best known as the founder of the digital print product company, Indigo, which was acquired by HP in 2002. In an interview that was published by GLOBES, an Israeli business paper, on January 9th, Landa was pointed in his criticism about the management and strategy of the company.

Landa's criticisms derive from the fact that, as he describes--

"[t]he company has lost half of its value. It's worth less than its debt [a drop of nearly 50% in its share price during this period, pushing its market cap down to $35 billion]. “

The problem starts with the inappropriateness of the board of directors as well as the CEO.

"… it's clear to me that they need one of two things: either a CEO with pharma experience or an experienced board of directors to guide him….. I'd like to see at least a third of the directors with substantial experience - at least one third. For that, the board of directors would have to replace itself, and that's not happening."

Landa continues--

"All the directors are excellent people with experience in their fields, but they can't devise a strategy for a company like Teva. It's no wonder that the company made such mistakes. The directors don't even know what questions to ask.”

In addition to the problem of the composition of the board of directors and the expertise of the CEO in the pharma industry, Landa frontally attacks the company's strategy, in the following words--

"In my opinion, the emphasis on generics is a big mistake. It's a misguided return to the comfort zone, based on the idea that what worked so well in the past will go on working. The world has changed, however. Generics is now competition over price - who can produce the most cheaply. Is that Israel's advantage? Cheap production? That's not what we are.

Teva should follow the trail blazed by COPAXONE - Israeli innovation and technology. Teva knows how to be innovative. It's such a pity that all this capital is going to generics. It's just tying the company's hands, and it can't make innovative acquisitions. Teva has to rid itself of its dependence on generics."

He was emphatic—Teva "mustn't be the Walmart of the drug market. It can't operate in the cheap mass sector."

Not surprisingly, Teva has a different view of the situation here.

The criticism leveled by Landa addresses the more general question of the proper business model for the company, given its historical success in the generic market overlaid by several profitable proprietary products. As Landa notes, the generic market puts a premium on operations, while the prerequisite for proprietary market penetration is R&D, either home-grown or acquired. And in this lies the challenge for Teva: can it successfully carry on with its generics business; does it have the savvy to identify winners in the proprietary space; and does it have the wherewithal to do successful R&D (recall that COPAXONE was based on a discovery made at the Weizmann Institute of Science)? To hear Landa, the answers to these questions may be a matter of commercial life or death for the company.

For more on patent exploitation and the public domain, see here.