In response to the crisis at Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA), medical device and biotech angel investor Mori Arkin says, "The global generics market is in a terrible state, but it wasn't unexpected. It did happen much more powerfully and quickly than could have been anticipated, but the general trends were visible.
"Globes": Was it predictable already in 2015, when Teva announced its acquisition of Actavis?
Arkin: "I think so. A company that lives its market should have the ability to analyze long-term trends."
Arkin is indirectly criticizing Teva and Erez Vigodman, its CEO at the time, who led the acquisition of Actavis, the generics division of Allergan, for $40 billion, while assuming a $35 billion debt for the purpose. Teva itself is now worth less than $18 billion, and the acquisition of Actavis, with the accompanying enormous debt, is the main reason for the loss of 75% of its value since the measure was announced two years ago.
What trends indicated the questionable state of the generics sector?
"There were three main trends. The first was the switching of innovative companies (manufacturers of original drugs, G.W.) from chemical to biological drugs, which left fewer chemical drugs for which generic imitations could be made easily. The second was that despite the mergers and acquisitions of companies in the sector, the overall level of competition rose, while more and more Indian companies constantly arose, and recently also companies from China and more US companies. So even though the number of products available for generic imitation fell, the number of competing players did not decrease. The third was consolidation in the buyers' market; in other words, the pharmacy chains, together with their leading suppliers. Every generic product is now marketed by 10 companies to three customers. In a situation like that, prices are driven to the floor. These processes do not appear to be cyclical, meaning that these trends will probably not be reversed, and the market will continue to weak."
Do you hold Teva shares?
"Yes - not many, but I have some."
For patriotic reasons, or because you think that the price is good?
"A little of both. The company's new products have great potential. In the migraines market, there will be several competitors for a $5-10 billion market, so revenue from this market very much depends on the company's relative standing in the market. The product is a good one, and the method of administering it is differentiable from the competing products. So with a little luck and marketing talent, as Teva showed with Copaxone, it can be a billion-dollar market. The movement disorders market can also generate a billion dollars at its peak within a few years. With this money, the debts can be paid, and more investments can be made later."
Do you also own Perrigo Company (NYSE:PRGO; TASE:PRGO) shares?
"Certainly. I hold them, and I'll continue holding shares in both Teva and Perrigo. Don't despair; Perrigo recovered in its most recent reports, and Teva will also recover."
What should Teva do now?
"Teva should focus on performance, not on devising a new strategy - they haven't got the money or capability for it, in any case, and maybe there's no need right now. They have to take full advantage of the synergy between their generics business and exploit economies of scale - there's no alternative, they're already there. At the same time, they should get the maximum from marketing new products."
Who can manage the company?
"The ideal manager is someone with a background in both generics and innovation. If they don't find such a person, it's better to take someone with experience in the branded field, because the medium-level managers in the company have accumulated a great deal of experience in generics, while it's lacking in innovation."
You mentioned the fact that original drugs today are mostly biological. What happened to Teva in the biosimilars sector (generic drugs for biological drugs)?
"It's a rising market, but it doesn't necessarily belong to generics companies like Teva. Such a product requires a different type of marketing; because it's only 'similar' to the original drug, you have to convince the doctors that the product is real. Teva will have to compete with the major companies in this area, and its success can't necessarily be taken for granted. Teva could have become more professionalized in this market than it did in the past decade."
Would you join Teva's board of directors?
"We invest in 20 companies in the health field now, and each one requires a great deal of attention and large-scale monetary investment. I'm busy worrying about my 'babies'."
These "babies" include Sol-Gel, which was previously marked as a candidate for an IPO, and was recently very successful in a trial of its treatment for acne; Valcare, which repairs mitral valves, one of the hot areas in the medical devices market; and BioSight, which has developed a method of making it possible to administer especially high dosages of drugs for treating acute myeloid leukemia (AML) with fewer side effects. "What's nice about our business is that you can't succeed in it without contributing something to the benefit of mankind, and that always gives you satisfaction," Arkin explains.
Perrigo, which acquired Agis from you, is also a generics company. Is it exposed to all the negative trends you described?
"Perrigo is more balanced. It also focused on drugs administered on the skin, especially for skin diseases, a field in which the entry barriers are still high, and competition is weaker." Concerning the sale of the Chemagis active ingredients plant by Perrigo last week, Arkin says that the sale to SK Capital can certainly be good for this business, which was not in Perrigo's focus. "Maybe it will get more attention from the fund. I believe that the plant will stay in Israel, because it's not so easy to move a chemical drug factory."
What did you think about the exit of biomedical company NeuroDerm, which was acquired for $1.1 billion by Japanese company Mitsubishi Tanabe?
"It's very nice. Everyone was a little skeptical, and so was I, but it was a great success. As an entrepreneur, I objected to skepticism, and as an investor, I try to be skeptical. That's the fate of entrepreneurs; they are always the victims of skepticisim."
Published by Globes [online], Israel Business News - www.globes-online.com - on August 13, 2017
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