Biotech: Teva's Next Triumph?

The Israeli maker of generics wants a piece of the fast-growing bio-drug market

Israel Makov should be a happy man. In the $46.5 billion world of generic drugs, his Teva Pharmaceutical Industries Ltd. (TEVA ), based outside Tel Aviv, is a quiet king. It's one of the largest sellers of generics in the U.S., where 70% of its 132 products are first or second in market share. It's also a leader in getting first dibs on big-name drugs that are coming off patent -- a real advantage, because the initial generic producer gets six months of exclusivity before others can flood the market. The $2.5 billion company even competes with Big Pharma with some branded drugs. All that helps explain why Teva's stock has climbed nearly 70% in the past year, to about $57.

What Teva lacks -- and what CEO and President Makov may soon get -- is a shot at one of the pharmaceutical industry's most lucrative segments: biological drugs. About a third of the drugs now in development are products of biotechnology. Among the best-known existing biotechnology drugs are human growth hormone, insulin, and interferon, which is used to treat hepatitis C. "It is the fastest area of growth," says Makov, 63, a veteran Israeli executive who joined the company in 1995. "We want to play in all the major parts of the generic market."

Sales of generics have exploded in recent years as consumers and employers alike seek relief from drug price increases. Generics, which generally cost 30% as much as the brand-name drugs on which they're based, made up 42.3% of all U.S. drug sales in the first eight months of this year, according to consultant IMS Health Inc. That's up from 37.6% in 2000, and generic sales are expected to grow an additional 20% this year. Insurers and consumers have even more reason to want a break on biologics, which can be vastly more expensive than other drugs. Genzyme Corp.'s (GENZ ) Cerezyme, an enzyme replacement therapy that's used to treat a rare genetic disorder called Gaucher disease, costs about $150,000 per patient each year.

However, the law currently doesn't allow for generic biologics. Manufactured through biological processes, often in large vats of cells, these drugs are far more complex than traditional chemical compounds. The fear is that if a generic isn't precisely identical to the original drug, it could act differently in the body. "We're talking about a safety issue here," says Carl B. Feldbaum, president of the Biotechnology Industry Organization, which represents many biotech companies with original drug patents. Teva essentially would have to mimic the clinical trials and efforts of a drug's first producer -- a pricey process that Makov likens to reinventing the wheel.


But with federal regulators feeling more comfortable about the science and more concerned about rising drug prices, Teva and other generics producers may soon catch a break. FDA Commissioner Dr. Mark B. McClellan says that "we are looking at some first steps toward generic biologics." The FDA recently decided to move the review of many biologic drugs from its Center for Biologics Evaluation & Research to its Center for Drug Evaluation & Research, signaling that biologics eventually may be approved in the same way as other drugs. While the FDA shares concerns about safety, some insiders argue that scientific advancements have made it easier to characterize and replicate biologics.

Yet while Teva and its rivals wait for the FDA to formulate new rules, they're pursuing their own branded biologics. On Oct. 7, Teva said it might acquire biotech player Savient Pharmaceuticals Inc. (SVNT ) in a deal that would be valued at $365 million. Among its products are a recombinant hepatitis B vaccine and genetically engineered human growth hormone. Makov says his company also has a stake in a handful of startups that are developing possible biological treatments for cancer, spinal cord injuries, and bone marrow transplants. Teva, in fact, already has a lucrative franchise in producing its own branded traditional chemical drugs, which are focused on multiple sclerosis and other neurological diseases. That business accounts for about a quarter of the company's sales.

But Teva's core focus remains pumping out as many generics as possible. Founded more than a century ago as a small wholesale drug distributor, it has grown rapidly since the late 1980s through aggressive acquisitions. Much of the growth came under chairman Eli Hurvitz, who was president and CEO for over 25 years. But there has been no slowdown under Makov, who became CEO last year. Teva recorded a 34% jump in sales in the second quarter, to $764 million, while net income before one-time items rose 49%, to $137 million.

Makov cites Teva's access to top science in Israel as a key advantage. But just as important, analysts say, is its aggressive legal strategy, with the company often fighting in court to get early access to drugs. The company is very aware that being based in a political hot spot can make some investors nervous. Teva, however, is global, with extensive research facilities in Europe and North America. About a third of manufacturing is done in Israel, with the rest spread out mainly to Eastern Europe and the U.S. Only a fraction of its revenues are earned at home, with North America contributing the bulk of sales.

With the $41.4 billion global biotech drug industry growing at double-digit rates, Teva clearly is positioning itself for the future. And what Makov wants is for Teva to be a major player when biologics go generic. "At the end of the day, regulators will encourage generics because everyone wants to save money," he says. The challenge will be to prove those savings don't come at a cost to safety.

By Diane Brady in New York, with John Carey in Washington and Amy Tsao in New York

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