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What are Generics?

Macro Trends in the Industry

What are Generics?

Overview of TEVA

Risks

Valuation

Branded Medicines are Expensive

• Brand‐name Pharma (PFE GSK) apply forBrand name Pharma (PFE, GSK) apply for patents to be sole distributors of their productsproducts

• Branded drugs sell for very high margins• Branded drugs sell for very high margins– Prozac, Paxil, Advil, Tylenol

Generics: Cheaper Drugs for Everyone!

Hatch-Waxman Encourages Generics

• 180 day exclusivity period for the first generics180 day exclusivity period for the first generics producer to challenge a patent– TEVA is particularly adept and has taken– TEVA is particularly adept and has taken advantage of this in the past

• Also allows for patent owners to put a 30• Also allows for patent owners to put a 30‐month “stay” on generics companies by litigatinglitigating– Congress placed restrictions in July 08.

What are Generics?

Macro Trends in the Industry

What are Generics?

Overview of TEVA

Risks

Valuation

Catalysts

• Global acceptance of generics as qualityGlobal acceptance of generics as quality products

• Push to lower healthcare costs• Push to lower healthcare costs– Aging population

• Many blockbuster drugs coming off patent in 2009– TEVA is positioned to capitalize

• Expansion into overseas markets

Generic Drugs in the U.S.

• Generic drugs currently dominate over 65% ofGeneric drugs currently dominate over 65% of prescriptions in the United States.– 20% of industry profits– 20% of industry profits

Many Blockbuster Drugs Coming off Patent in 2009

• Desloratadine ‐ ~400 million in sales 18 7 billion• Levetiracetam – 700+ million in sales• Ramipril – 700+ million in sales• Sumatriptan – 1 billion in sales• Rabeprazole 1 1 billion in sales

18.7 billioncoming off t t i• Rabeprazole – 1.1 billion in sales

• Lamotrigine – 1.1 billion in sales• Tamsulosin – 1.3 billion in sales• Valacyclovir – 1 3 billion in sales

patent in 2009 from 

Valacyclovir 1.3 billion in sales• Rosiglitazone – 1.5 billion in sales• Escitalopram oxalate – 1.9 billion in sales• Lamotrigine – 2.2 billion in sales

13 drugs alone in theg

• Topiramate – 2.2 billion in sales• Lansoprazole – 3.3 billion in sales• Atorvastatin Calcium – 6 billion in sales (2010)

alone in the U.S.

Overview of TEVA:Generics (cont.)

Generics market share

Mature generics markets

Emerging i

Growth

generics markets

Growth

Growth

TEVA is Poised to Take Advantage

• 20% Market share in the U S (before Barr20% Market share in the U.S. (before Barr acquisition)

• 150+ generic drugs waiting for approval• 150+ generic drugs waiting for approval– The drugs they’re replacing are worth more than 90 billion in annual sales90 billion in annual sales

Obama’s Presidency is a Boon

Obama’s plan specifically calls for “allowing the importation of safe medicines from otherthe importation of safe medicines from other developed countries, increasing the use of generic drugs in public programs and takinggeneric drugs in public programs and taking on drug companies that block cheaper generic medicines from the market ”medicines from the market.

Many Countries Favoring Generics

• Particularly mature countries where theParticularly mature countries where the population is aging– Japan– Japan

• Governments are realizing generics are the most effective way to rein in soaringmost effective way to rein in soaring healthcare costs

TEVA i ll i i d– TEVA is well positioned

What are Generics?

Macro Trends in the Industry

What are Generics?

Overview of TEVA

Risks

Valuation

Why TEVA is a great company

• World’s largest player in the generics industryWorld s largest player in the generics industry

• Vertically integrated

i bi d l• Big‐to‐big model– Skilled at incorporating strategic acquisitions

– Expertise in research and development

• Diversified– Products

– International exposurep

Overview of TEVA: An Introduction

• Headquartered in Petah Tikva IsraelHeadquartered in Petah Tikva, Israel

• Revenue of 9.4 billion USD in 2007

i 60 i• Presence in over 60 nations

Overview of TEVA:Company Strategy

• Product/geographic diversityProduct/geographic diversity

• Vertical integration

i h h h &• Increase organic growth through R&D

• Intellectual property

• Strategic acquisitions

Overview of TEVA: Revenue Breakdown (by region)

TEVA’s Sales in 2007 (by Region)Israel4% Others

10%

TEVA s Sales in 2007 (by Region)

10%

North America58%

Europe28%

Overview of TEVA:Revenue Breakdown (by segment)

TEVA’s Revenue in 2007 (by Segment)

API, 6%*

TEVA s Revenue in 2007 (by Segment)

Innovative Pharma, 19%

Generics, 75%

*most API sales are internal; this revenue reflects only external sales

Overview of TEVA:Company Strategy (cont.)

TEVA has been steadily increasing their R&D expenditure to spur organic growth

R&D Expenditure (millions of USD)

R&D Expenditure as % of Revenue

495

581

500

600

700

)

7.10% 7.00%

5.90% 6.20%6 00%

7.00%

8.00%

338 369

300

400

500

3 00%

4.00%

5.00%

6.00%

0

100

200

0 00%

1.00%

2.00%

3.00%

0

2004 2005 2006 20070.00%

2004 2005 2006 2007

Overview of TEVA:Company Strategy (cont.)

• Intellectual propertyIntellectual property– More than 90% of all submitted patents are granted

Number of Granted Patents (TEVA)

1200

1400

1600

Number of Granted Patents (TEVA)

800

1000

1200

200

400

600

0

2000 2001 2002 2003 2004 2005 2006 2007

Overview of TEVA:Company Strategy (cont.)

• Strategic AcquisitionsStrategic Acquisitions– IVAX in January 2006

• Added huge respiratory drugs portfolioAdded huge respiratory drugs portfolio

• IVAX previously had problems with costs as competition increased and generic drug prices decreased

– TEVA’s vertically integrated model solved this problem

– Barr Pharmaceuticals in December 2008 – tap into US k t th h B d th C t l/E tUS market through Barr and the Central/East European market through its subsidiary Pliva

• Barr 2007 revenue: 2 5 billion• Barr 2007 revenue: 2.5 billion

Overview of TEVA:Company Strategy (cont.)

Strategic acquisitions provide TEVA with moreStrategic acquisitions provide TEVA with more diverse products, forward vertical integration 

and local expertiseand local expertise

Overview of TEVA:Big to Big Model

Big player getting bigger

Faster organicFaster organicgrowthgrowth

Better atBetter atM&AM&A

Overview of TEVA:Generics

90%100%

Others

International Market Share Breakdown in 1997 and 2007

60%70%80%90% Others

Sandoz

WatsonPharma

M l65%

45%

30%40%50%60% Mylan

TEVA

7%

10%

11%13% Barr had 6% of

0%10%20%30% 7%

8%12%8%

13%

21%

Barr had 6% ofinternational marketshare in 2007. Thiswas not included in

1997 2007Consolidation of generic industry evident: top 4 players currently hold 55% (or 61% if you consider TEVA’s acquisition of Barr) of the

TEVA’s figure.

hold 55% (or 61% if you consider TEVA s acquisition of Barr) of the market share compared to just 35% a decade ago.

Overview of TEVA:Generics (cont.)

TEVA is the world’s largest producer and distributor of generic pharmaceuticalsg p

Overview of TEVA:Innovative Pharmaceuticals

• CopaxoneCopa o e– First innovative drug developed in Israel to receive FDA approval

– Proven to reduce relapses and new lesions in Multiple Sclerosis (MS) patients

– Only injected therapy not associated with flu‐like– Only injected therapy not associated with flu‐like symptoms, increase in MS‐related fatigue or depressive symptoms

– Approved for marketing in 47 nations– Number 1 MS drug worldwide, $562 million in sales in Q3 2008Q3 2008

Overview of TEVA:Innovative Pharmaceuticals (cont.)

• AzilectAzilect– Leading drug for treatment of Parkinson’s disease

Drug in tablet form– Drug in tablet form

– Proven to slow the progression of Parkinson’s• Most other drugs are aimed only at symptomatic relief• Most other drugs are aimed only at symptomatic relief

– Proven to work during every stage of Parkinson’s

Approved for marketing in 32 nations– Approved for marketing in 32 nations

Overview of TEVA:Innovative Pharmaceuticals (cont.)

• Looking to the futureLooking to the future– Department looking into oncology

Tight relationship with the Israeli academic– Tight relationship with the Israeli academic community

• Early access to potential projectsEarly access to potential projects

– Focus on products with meaningful differentiation from existing onesg

• Clinical attributes

• Expected economic value/benefit to patients

Overview of TEVA:Active Pharmaceutical Ingredients

• Portfolio of over 250 compoundsPortfolio of over 250 compounds

• 18 production facilities worldwide

89% f l i l• 89% of API sales are internal

• External sales more prevalent in China, India and Australasia– Provides outsourced solution to achieving efficient pharmaceutical manufacturing

– Provides custom synthesis services

Overview of TEVA:API (cont.)

TEVA API provides TEVA Pharmaceuticals withTEVA API provides TEVA Pharmaceuticals with backward vertical integration, allowing TEVA 

to build on its big to big modelto build on its big to big model

Overview of TEVA:Company Outlook

• Management guidance: EPS range of $2 79 toManagement guidance: EPS range of $2.79 to $2.85, above analyst predictions of $2.74– Increased from previous forecast of $2 69 to $2 75– Increased from previous forecast of $2.69 to $2.75

• 145 products awaiting FDA approval41 i l– 41 tentative approvals

– Branded products generated annual US sales of 96 billi i t t lbillion in total

Overview of TEVA:Company Outlook

TEVA’s 20/20 aim (by 2012)/ ( y )

REACH

$20$20EXCEED

2020%%$20$20billion

2020%%net incomebillion

salesnet incomemargin

What are Generics?

Macro Trends in the Industry

What are Generics?

Overview of TEVA

Risks

Valuation

Risks:Increased Competition

• Generic marketGeneric market– Price reaching AC after 8 entrants

• Innovative Drugs Market• Innovative Drugs Market– 6/2008, Mylan Inc‐Copaxone alternative

• From Brand‐Name Manufacturers

• From Retailers That are Building Up to Manipulate Prices

Risks:Modification in Regulation

• Hatch‐Waxman ActHatch Waxman Act – 2008‐ 180 day exclusivity for ProAir HFA (AlbuterolInhaler) PantoprazoleInhaler), Pantoprazole

– 2007 Zocor, Zoloft, Wellbutrin XL and Pravachol

• Medicaid/Medicare• Medicaid/Medicare – Deficit Reduction Act of 2005‐“average manufacturer price” benchmark for prescriptionmanufacturer price  benchmark for prescription drug reimbursement instead of “average wholesale price”p

Risks:Failure to Win Patent Litigations

• TEVA producing drugs before litigation ended2008 d d All ® N ti ® L t l® d– 2008 produced Allegra®, Neurontin®, Lotrel® and Protonix®

January 2008 sued for Protonix®– January 2008 sued for Protonix®

Risks:Forex, M&A

• ForexForex

• M&A

– Ex. Mylan acquiring Merck division

Risks:Political

Military conflictMilitary conflict

Risks:Political (cont.)

Why TEVA is a good buy

• Global acceptance of generics as quality productsGlobal acceptance of generics as quality products– TEVA is the largest player in the generics industry

• Most nations trying to lower healthcare costs• Most nations trying to lower healthcare costs

• Many blockbuster drugs coming off patentTEVA is positioned to capitalize– TEVA is positioned to capitalize

• TEVA’s vertically integrated business model

• Strategic acquisitions

• TEVA’s international exposure

Q&A

What are Generics?

Macro Trends in the Industry

What are Generics?

Overview of TEVA

Risks

Valuation

Relative Valuation

TEVA WatsonPharma MylanNovartis (Sandoz)

Op Margins(TTM)

20.51% 13.17% ‐19.74% 19.29%

Net Income Margins (TTM)

17.58% 8.75% ‐30.38% 17.89%Margins (TTM)

ROA (TTM) 8.01 6.30 ‐19.95 9.55

ROI (TTM) 10.22 7.10 ‐24.07 12.49

ROE (TTM) 13.64 11.43 ‐68.41 15.07

Current Ratio (last quarter)

2.20 3.32 1.88 1.17

% of Revenuefrom Generics

75% 57.04% 86.98% 18.33%

Revenue from  2131.5 433.6 1,441.1 1,918Generics (Lt Q)