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									                                Strategic Profile
                   Pharmaceutical Industry Situational Analysis
                             Competitive Analysis
                            Teva Internal Analysis
                            Recommended Strategy

                        BUSA 499: Strategic Management
                                May 13, 2008
Lauren Emme rson           Heather Eylar          Sean Roach      Sara Stover
                                                                                                               Teva       1

Table of Contents

  I.      Executive Summary .................................................................................2
  II.     Strategic Profile........................................................................................3
  III.    Pharmaceutical Industry Situational Analysis .........................................4
          a. Industry Lifecycle ..............................................................................4
          b. PESTEL analysis................................................................................5
          c. Porter’s Five Forces ...........................................................................10
          d. Competitive Analysis .........................................................................13
                   i. Competitive Environment ......................................................13
                  ii. Barr Pharmaceuticals Inc. ......................................................15
                 iii. Pfizer Inc. ...............................................................................19
                 iv. Alpharma................................................................................22
                  v. Financial Comparison ............................................................26
          e. Pharmaceutical Key Success Factors .................................................28
  IV.     Teva Internal Analysis .............................................................................30
          a. Value Chain Analysis.........................................................................30
          b. Capabilities.........................................................................................34
          c. VRIN Analysis and Core Competencies............................................36
          d. SWOT Analysis .................................................................................37
  V.      Recommended Strategy ...........................................................................43
  VI.     Implementation ........................................................................................45
  VII.    Forecasted Results....................................................................................50
  VIII.   References ................................................................................................51
  IX.     Appendix 1: Analysis of Economic Value Added ..................................54

  Table of Figures

  Figure 1:   Comparison of Key Financial Ratios ..................................................26
  Figure 2:   Teva SWOT Analysis..........................................................................37
  Figure 3:   Revenues based on R&D Expenditures...............................................45
  Figure 4:   ANDAs Pending ..................................................................................46
  Figure 5:   Economic Value Added.......................................................................50
                                                                                  Teva      2

Executive Summary

        Teva Pharmaceuticals is the current global leader in generic pharmaceutical
products. This industry is currently in the shakeout stage of its lifecycle, characterized by
consolidation of companies into few global juggernauts and very high competition. The
global market for generics is expected to increase by 60% by 2012 representing
tremendous revenue potential for the company. One of the largest users of
pharmaceutical products globally is the elderly population. This demographic segment is
expected to double in the next several decades and will demand pharmaceutical therapies
for cardiovascular, central nervous system, alimentary, and respiratory health.

        Key success factors for the pharmaceutical industry at large are identified to be
R&D, patents and exclusivity, marketing expertise, economies of scale, technology, and
supply chain management. Internal analysis found research and development to be
Teva’s primary core competency, allowing the company to quickly produce generic
equivalents of existing branded therapies as well as innovative drugs and manufacturing
processes. Economies of scale was the only key success factor that Teva was found to
lack in comparison to industry giants such as Pfizer. Teva’s active pharmaceutical
ingredients expertise and their focused product lines allow the company to continue to
compete despite lacking the resources and capacity to produce equivalent volumes.

    Given the nature of the industry, global market trends, and the key success factors and
core competencies at Teva’s disposal, a differentiation strategy applied to both their
generic and proprietary product lines will best position the corporation for sustainable
competitive advantage and future success. Strategic recommendations include the

      Successfully develop and market generic products before competitors
      Continue to focus on the aging population target market
      Continue to investment in biogenetics and biopharmaceuticals

To implement this strategy, Teva will need to implement the following:

      Increase investment in R&D by 7.5% of sales aimed at generic and
      Continue to focus on therapeutic fields of central nervous system diseases,
       autoimmune diseases, respiratory diseases, and oncology
      Continue to vertically integrate and utilize API capabilities

Teva’s differentiated focus has provided the company with a strategic advantage in the
industry. These strategies will reinforce this focus allowing the company to be successful
in the future.
                                                                                   Teva   3

Strategic Profile
        “Teva Pharmaceutical Industries Ltd. is a global pharmaceutical company
specializing in the development, production and marketing of generic and proprietary
branded pharmaceuticals and active pharmaceutical ingredients. Teva is among the top 20
pharmaceutical companies and among the largest generic pharmaceutical companies in
the world.” –TEVA Pharmaceuticals

        “With more than a century of experience in the healthcare industry, the Company
enjoys a firmly established international presence, operating through a carefully tailored
network of worldwide subsidiaries. Headquartered in Israel, 80% of Teva's sales, which
totaled US$9.4 billion in 2007, are in North America and Europe. Teva has over 29,000
employees worldwide and production facilities in Israel, North America, Europe and
Latin America.” –TEVA Pharmaceuticals

        Teva’s Israeli roots are incredibly significant considering Israel is the world
leader in medical research and technology.
                                                                                Teva      4

Industry Lifecycle
        The pharmaceutical industry in the United States is currently defined by very high
rivalry between large multinational companies with a high level of capital investment
pursuing aggressive acquisition and merger strategies (Datamonitor, 2007a). The growth
of the US industry is beginning to decelerate with estimates of a 4.4% compound annual
rate of growth (CARG) by 2012 compared to 6.6% in 2006 (Datamonitor, 2007a). The
US pharmaceuticals market is still forecasted to increase its value by 24.1% between
2007 and 2012; an increase from $276.4 billion to $343.1 billion (Datamonitor, 2007a).

        The US segment makes up 55 percent of the global market’s value with Europe
and Asia-Pacific markets trailing with 26.7 percent and 18.4 percent respectively
(Datamonitor, 2007f). Of these three markets, the US is the only one which is forecasted
to face CARG deceleration while the Asian-Pacific is expected to experience the highest
growth over the next several years (Datamonitor, 2007c).

       These trends characterize a transition from the growth stage to the beginning of
the maturity and shakeout stage of the industry life cycle.
                                                                                  Teva      5

PESTEL Analysis
Political Factors

         Development new prescription drugs from the initial discovery of potential
therapeutic agents through to their marketing authorization generally cost an excess of
$800 million (Datamonitor, 2007c). The meticulous and extensive clinical trials needed
to satisfy the regulatory authorities of the efficacy and safety of new drugs for human use
represent the primary driver for these costs.

         U.S Food and Drug Administration (FDA) approval is required before any new
drug can be marketed. Before a New Drug Application (NDA) can be submitted to the
FDA for approval, there are several steps that must first be taken: The first is extensive
laboratory and animal testing studies (Barr, 2008c). An average of 3.5 years is taken to
obtain the necessary pre-clinical data to satisfy the Investigational New Drug, or IND,
application, or its equivalent in countries outside the United States where clinical trials
are to be conducted. Out of 5,000 agents, 5 will likely make it to the next stage: clinical
trials. Phase I of the trials tests the drugs on a small set of healthy human subjects for
safety, adverse effects, dosage, tolerance absorption, metabolism, excretion and other
elements of clinical pharmacology. This phase typically takes one year to complete.
Phase II tests the effectiveness of the drugs on a larger sample size of humans who
represent the intended patient population. Over the next two years, researchers assess the
efficacy of the compound for a specific indication, determine dose tolerance and the
optimal dose range, and gather additional information relating to safety and potential
adverse effects. Phase III of clinical trials evaluates clinical safety and efficacy in an
expanded patient population at typically dispersed study sites. The purpose of this phase,
which takes an additional three years, is to determine the overall risk-benefit ratio of the
compound and to provide an adequate basis for product labeling. By this time, only one
of the initial thousands of agents is submitted in a New Drug Application to the FDA.
During the subsequent 2.5 years, the FDA thoroughly reviews the data and application
submitted and may approve the drug for marketing. Even after initial FDA or other
health authority approval has been obtained, further studies, including Phase IV post-
marketing studies, may be required to provide additional data on safety. An additional
application must be submitted to the FDA or other regulatory authority for approval of
any modifications to the drug, including changes in indication, manufacturing process or
labeling or a change in the manufacturing facility (Barr, 2008c).

        The process in all takes an average of 12 years and costs upwards of $800 million
for each drug. The result of not following regulation procedures, however, is harsh
reprimanding by regulatory bodies including heavy fines and barring from marketing
drugs (Barr, 2008c).

        In comparison to the drug approval process for branded drugs, generic
pharmaceuticals can rely on the safety and efficacy established by the clinical trials of
their innovators. By using the Abbreviated New Drug Application (ANDA) process of
the FDA, these drugs can be approved and out on the market within 2-4 years (Barr,
                                                                                 Teva      6

2008b). The company only has to prove to the FDA that its generic product is equivalent
to the branded product in terms of active ingredients, dosage form, standards for purity
and quality, standards for manufacturing, amount of drug absorbed over the same time,
and clinical effect (Barr, 2008b).

       Given the tremendous time, investment, and risk associated with this process, any
changes that the FDA or other regulatory bodies make has dramatic effects on
pharmaceutical companies.

        In addition to regulating the pharmaceutical market, many government health
authorities are major buyers of prescription drugs. This is especially true in countries
with socialized healthcare programs. Establishing contracts with government healthcare
providers can be very stable and profitable; however, governmental market interference
in sales to private and individual buyers can keep companies from tapping into lucrative
markets. Many countries with patient co-payment and reimbursement schemes for
pharmaceuticals have government authorities to decide which drugs should be covered,
and to fix the maximum price at which individual drugs can be sold. Also, many
governments in the world’s major developed markets have initiated pricing reviews in
order to balance public healthcare spending budgets, placing significant downward
pressure on pharmaceutical market pricing (Datamonitor, 2007a).

        Bruce L Downey, Chairman and Chief Executive Officer of Barr
Pharmaceuticals, claimed the Barr’s most recent annual report that momentum has been
growing in Washington, DC, to address escalating biopharmaceutical spending. The
most significant response was the reintroduction in 2007 of the Access to Life Saving
Medicine Act in the U.S. Congress (SEC, 2008). Downey claimed that an approval
pathway for biogenerics will bring desperately needed competition into the
biopharmaceutical marketplace and put an end to permanent monopolies (SEC, 2008).
This proposed bill would allow the U.S. Food and Drug Administration (FDA) to
approve applications for generic versions of biopharmaceutical products licensed under
the Public Health Services Act without repeating expensive and duplicative clinical trials
(Datamonitor, 2007a). It would also create an improved process for ensuring that patent
disputes are resolved early to avoid delays in competition caused by endless or uncertain
patent litigation. Such a change would favor and benefit generic manufacturers of
biopharmaceutical products tremendously.

        The upcoming elections are also expected to have major ramifications for
corporate business in the US. Republican hopeful John McCain seeks to make the
corporate tax-cuts made during the Bush administration permanent. Both democratic
candidates have taken tough stances on corporate business and seek to repeal the tax-cuts,
of which major corporations such as pharmaceuticals benefited greatly from. Even if
McCain were to take office, Republicans would need to retain and regain a large number
of seats in Congress for the tax-cuts to be renewed (Chozick, 2008).
                                                                                  Teva      7

Economic Factors

        The US is currently facing a major economic downturn. Soft economic numbers,
mostly due to the sub-prime loan crisis and high oil prices, is predicted to continue to
have detrimental effects on corporate profits across the board (Scherer, 2008).
Consumers will also be impacted from the economic slump. An anemic economy would
also present a challenge to the Federal Reserve Board, which might opt to keep cutting
interest rates. Behind the dim forecasts for next year are some of the same factors that
beset the US economy this year: stress in the housing market and relatively high oil
prices. These twin problems will, in 2008, finally get to the consumer, say economists.
Scott Anderson, chief economist at Wells Fargo in Minneapolis forecasted, "Consumer
spending in 2008 will slow to a 1.8 percent pace, but it could be below 1 percent,"
(Scherer, 2008).

         These recent uncertainties in the credit markets have prevented large investors,
pharmaceuticals included, from liquidating holdings of market auction debt securities in
recent auctions because the amount of market auction debt securities submitted for sale
has exceeded the amount of purchase orders (SEC, 2008). In addition, economists expect
that in response to current economic conditions, the Federal Reserve will continue to cut
interest rates to try and evade recession (Scherer, 2008). The current overall interest rate
in the States is at 3 percent. The US has seen 17 successive interest rate hikes over the
past few years (Datamonitor, 2007d).

         Repercussions are being felt in the global market as well. According to the
Organization for Economic Cooperation and Development, global total credit losses of
$1.4 trillion will cause a contraction in world GDP of 2.5 percentage points, or half the
current rate of global growth (Roche, 2008). Such universal economic slow-down will
likely be a detriment to pharmaceutical companies both up a nd down the supply chain.

        Volatility in foreign exchange rates has also threatened the operations of
international pharmaceutical companies since a significant portion of their revenues and
earnings are generated internationally in various currencies (SEC, 2008). In addition,
many have substantial investments in foreign subsidiaries whose net assets are exposed to
currency translation risk. Exposures that cannot be managed operationally are generally
hedged using foreign exchange forwards, swaps, and option contracts (SEC, 2008).

Sociological Factors

        Alternative or holistic medicines have gained substantial popularity among the
general public in recent years. These medicines are relatively inexpensive to produce and
can often be sold at a premium. This is despite their alleged therapeutic benefits being
questioned by the medical community, and the clear lack of rigorous clinical testing and
target specificity of their pharmaceutical counterparts (Datamonitor, 2007c). Still, they
are often used as a substitute to pharmaceutical medicine and are thus a threat to over-
the-counter drug sales. Prescription drugs are currently not as threatened by these
“natural” therapies.
                                                                                 Teva      8

        Some alternative and holistic therapies are now being offered in medical
insurance plans. An example is American Specialty Health, a San Diego-based insurer
that provides alternative-medicine coverage to 12.6 million members. Chiropractic care,
acupuncture treatment, herbal supplements, and even magnetic therapies are being
offered as alternatives to “popping pills,” (Petersen, 2005).

        Many consumers have been negatively affected by cases of pharmaceuticals
causing harmful, even lethal reactions for some people. The Vioxx debacle is one of the
more famous examples and the resulting public outcry and litigations created a PR
disaster for Merck, Vioxx’s producer. Unfortunately, it also delivered splash damage to
the entire industry, lowering credibility and boosting the market position of “natural”
therapies (Petersen, 2005). This damage is still being felt by the industry to this day.

Technological Factors

         The Patent Reform Act which is currently before the US Congress could represent
a major threat to technological innovation in the world across all industries. Phil
Johnson, chief patent attorney for Johnson & Johnson claims that this bill is "almost
everything an infringer could ever want." A small group of very large computer
technology companies, including Microsoft, Intel and Oracle were involved in the
creation of this reform bill. These companies have been criticized for relying upon
market power to maintain their dominant positions, being serial patent infringers, and for
involvement in antitrust suits (Vandagriff, 2007). Biotechnology, pharmaceutical,
medical-devices industries, as well as several major universities, including the presidents
of every Big Ten university and the University of California system, all have opposed
this bill (Vandagriff, 2007).

        The National Venture Capital Association has claimed that the c urrent legislation
"could put in jeopardy the existing supports necessary for entrepreneurial risk,"
(Vandagriff, 2007). The proposed changes would greatly increase the costs of securing a
basic US patent and expand filing requirements and processing time, reducing a patent's
term of protection. Without globally competitive, cutting-edge, protected technology to
support R&D and operations, the pharmaceutical industry could face major

         This would not only affect US companies, but foreign innovators as well. A good
example is Israel, whose tremendous economic and export growth over the last 20 years
has been based on our patent-centric technology sector. The number of US patent
applications filed by Israeli inventors has grown from 632 in 1990 to 3,617 in 2007,
representing an almost 600-percent increase (Frieder, 2008). If this bill is enacted into
law, it is expected that technological innovation, especially in the booming biotech
industry, will be negatively impacted having a ripple effect on the countries that support
and depend on them.
                                                                                    Teva     9

Environmental Factors

        Concerns over the rise of drug-resistant biological pathogens have been steadily
growing in the medical community over the last couple of decades. A current example is
Methicillin- resistant Staphylococcus aureus (MRSA), a bacterium that can live
harmlessly in the skin or nasal cavities but attacks wounds and causes life-threatening
infections, including pneumonia and blood poisoning. Over the years, it has evolved into
a superbug that resists most common antibiotics resulting in over 19,000 estimated deaths
every year (O’Brien, 2008).

        These bacteria are able to adapt to antibiotic treatments when exposed, but not
killed by them. The result is a “super-bug” that cannot be cured by traditional therapies.
Overuse of pharmaceuticals can lead to selecting out the resistant strains of pathogens,
which are able to infect organisms in the biosphere, including humans, and cannot be


        The manufacture, use, and sale of generic and branded products have been the
subject of substantial litigation in the pharmaceutical industry. This is particularly true in
the context of litigations involving the abbreviated new drug applications (ANDAs) and
new drug applications (NDAs) filed with the FDA (Datamonitor, 2007a).

         Generic drug manufacturers frequently challenge the patent protection of
proprietary pharmaceutical producers in order to gain access to their market. The US
Federal Trade Commission has recently released a proposal with the support of US
Senator Cole which many leaders in the pharmaceutical industry fear will threaten their
ability to challenge patents. Some of the unintended consequences cited by critics
include limiting the number of patent challenges and limiting the number of pre-patent
expiry launches (SEC, 2008). The added costs of these legal changes would ultimately
be placed on the consumer.
                                                                                  Teva     10

Porter’s Five Forces Model

Threat of New Entrants

        “The development costs of a new prescription drug from the initial discovery of a
potential therapeutic agent, through to its marketing authorization, are typica lly in excess
of $800 million” (Datamonitor, 2007e). Additionally, the whole process is extremely
risky due to routine failures and the potential of substantial losses. Considering such high
development costs and risks, the threat of new entrants into the pharmaceutical market,
particularly regarding research-based companies, is weak (Datamonitor, 2007e).

        Also weakening the threat of entrants is the high degree of proprietary knowledge
within the industry. Many pharmaceutical companies are secretive about discoveries and
product development. Due to patenting laws for new drugs, companies are able to recover
development expenses and are therefore guaranteed profitability (Datamonitor, 2007e).

Bargaining Powe r of Suppliers

      “Major suppliers to the pharmaceutical industry are manufacturers of Active
Pharmaceutical Ingredients (APIs), which form a sub-sector of the chemical industry”
(Datamonitor, 2007e).

        Although most large multinational pharmaceutical companies have major
investments in fine chemical manufacturing, the wide diversity of chemicals required to
produce most drugs means that manufacturers of APIs maintain supplier power.
Increasing this power, is the fact that smaller pharmaceutical companies have less
chemical synthesis capabilities and therefore rely more heavily on API manufacturers
(Datamonitor, 2007e).

       Also enhancing the power of APIs are the contractual arrangements they are
under with pharmaceutical companies. These agreements increase switching costs and
supplier power. However, to minimize the costs of purchasing API’s and to mitigate
supplier power, pharmaceutical companies employ sourcing managers (Datamonitor,

        The final component increasing supplier power is the development of new
therapeutic agents which often requires sourcing of novel APIs, for which chemical
manufacturers can charge pharmaceutical companies a premium. If the drug successfully
reaches the market, the supplier of a novel API can reap significant benefits. “Also,
pharmaceutical companies need employees with high levels of skill in disciplines such as
synthetic chemistry, biochemistry, and so on” (Datamonitor, 2007e). Overall, supplier
power with respect to the pharmaceuticals market is strong.
                                                                               Teva      11

Bargaining Powe r of Buyers

        Generally, the major buyers of prescription drugs are government health
authorities, public or private health insurance providers, and individual consumers
(Datamonitor, 2007e). Decisions of consumers on which drugs to buy often depend on
the prescriptions of individual medical practitioners. Therefore, pharmaceutical
companies largely direct marketing efforts at physicians, with whom they have a
significant degree of influence over. This complicates the issue of buyer power in the
pharmaceutical market (Datamonitor, 2007e).

       Weakening buyer power is the availability of several different drug treatments
which allows manufacturers to showcase genuine clinical benefits for its branded and
patented product, thereby differentiating it. “However, where generic equivalents to a
branded drug exist, differentiation is decreased and buyer power enhanced. Overall,
buyer power with respect to the global pharmaceuticals market is moderate”
(Datamonitor, 2007e).

Threat of Substitutes

        For a given medical condition, there are usually several different suitable drugs
that can be used for treatment. Therefore, Pharmaceutical companies must invest heavily
in marketing campaigns to promote the prescription of their drug. If the patent has
expired on a brand name drug, generic drugs, which are often considerably cheaper, can
become a significant substitute (Datamonitor, 2007e).

        Other substitutes, which have significantly increased in recent years, a re
alternative and holistic medicines. Although they are relatively inexpensive and promise
therapeutic benefits, alternative medicines, are often disputed within the medical
community. Furthermore, they lack the rigorous clinical testing and target specificity of
their pharmaceutical counterparts (Datamonitor, 2007e).

         “It should also be noted that alternative medicines present a more significant
threat to the sale of over-the-counter medicines compared to prescription medicines. As
alternative medicines are generally purchased directly by patients, whereas the price of
most ethical drugs to the patient is heavily subsidized by either the state or health
insurers, these substitutes may be regarded as more expensive” (Datamonitor, 2007e).
Overall, threat of substitutes is moderate to weak.

Intensity of Rivalry Among Competitors

        Major players within the pharmaceutical market are typically large multinational
companies with high levels of capital investment and comparatively high fixed costs and
exit costs. These factors produce a high degree of rivalry within the market (Datamonitor,
                                                                             Teva     12

       Also promoting fierce competition within the industry are substantial
development costs for a given prescription drug, the existence of competing drugs within
a given therapeutic area, and the absence of switching costs for the healthcare buyers.
Overall, the pharmaceutical industry displays a strong leve l of rivalry (Datamonitor,
                                                                                    Teva     13

Competitive Environment

      Within the pharmaceutical industry, there are several different forms of drugs and
treatments available for a given medical condition. Where a manufacturer can exhibit
legitimate clinical benefits for its branded and patented product, in a way highlighting it,
the buyer power is destabilized. On the other hand, where generic equivalents to a
branded drug exist, decreasing differentiation occurs within the market and buyer power
increases (Datamonitor, 2007e).

      Development costs are high and risky but the threat of new entrants into the
pharmaceutical market is weak in regards to research-based companies. Major players
within the pharmaceutical market are usually large multinational companies that hold a
high level of capital investment. They usually have moderately high costs and exit costs,
producing a high degree of rivalry within the market (Datamonitor, 2007e).

      Depending upon the healthcare system set up in individual countries, the major
buyers of pharmaceuticals/prescription drugs are government health authorities, health
insurance providers (public or private), and individual consumers. Medical practitioners,
doctors, are usually the ones to issue a prescription to a patient. Therefore, the marketing
done by pharmaceutical companies focuses efforts towards physicians with whom one
can utilize a significance degree of influence. This creates complications along the issue
of buyer power within the pharmaceuticals market. There are many different drug
treatments available for a given medical condition but the manufacturer has the ability to
demonstrate authentic clinical benefits for its branded and patented product, thereby
differentiating it and weakening the buyer’s power. Generic equivalents to brand name
drugs exist, which decreases differentiation and enhances the buyer power (Datamonitor,

      Major suppliers to the pharmaceutical industry are manufacturers of Active
Pharmaceutical Ingredients (APIs), which form a sub-sector of the chemical industry.
Many large multinational pharmaceutical companies invest in fine chemical
manufacturing to provide a degree of self-sufficiency. The wide diversity of chemicals
required by pharmaceutical companies demonstrates and defines how the manufactures of
APIs maintain supplier power. The capabilities proved by chemical synthesis make them
ideal candidates for the integration into the market of manufacturing generic drugs.
Smaller pharmaceutical companies have less chemical synthesis capability, and therefore
rely more closely on API manufacturers (Datamonitor, 2007e).

      The expansion of new therapeutic agents often requires the sourcing of novel APIs,
for which chemical manufacturers can charge a premium. Pharmaceutical companies
need employees with high levels of skill in disciplines such as synthetic chemistry,
biochemistry, etc. In conclusion, supplier power with respect to the pharmaceuticals
market is strong standing (Datamonitor, 2007e).

      Development costs accrue from novel prescription drugs and the most other costs
are incurred in the rigorous and extensive clinical trials desirable to s atisfy the regulatory
                                                                                Teva      14

authorities of the efficacy and safety of the drug for human use. This process can be
incredibly risky. To reduce risk, one must go through concurrent drug development
(Datamonitor, 2007e).

      Proprietary knowledge within the industry has increased with many pharmaceutical
companies keeping specifics of drug discovery processes and development under wraps,
while patents for new drugs protect the interests of the developer thereby allowing the
recouping of development expenses and ensuring profitability. Considering all of the
above, the most realistic diagnosis for companies entering the market lie within the
pharmaceutical manufacturing sector, either producing branded drugs under license from
the developer, or generic drugs, for which patents do not apply or have expired. The
threat of new entrants with respect to the global pharmaceuticals market is weak
(Datamonitor, 2007e).

      “Companies must invest significantly in extensive sales and marketing operations,
with large sales teams and extensive geographical influence, in order to maximize
revenues. It is through sales and marketing that major pharmaceutical companies aim to
gain dominance in the market. Overall, the pharmaceutical industry displays a strong
level of rivalry (Datamonitor, 2007e).”

      “Pfizer is the world's largest research-based pharmaceutical company. The
company is engaged in discovering, developing, manufacturing and marketing of
prescription medicines for humans and animals. The company operates through three
business segments: pharmaceutical, animal health and corporate/other. Here we focus on
the pharmaceutical segment which includes treatment for cardiovascular and metabolic
diseases; central nervous system disorders; arthritis and pain; infectious and respirator y
diseases; urogenital conditions; cancer; eye disease; endocrine disorders; and allergies.
The top products under this segment include Lipitor (treatment of elevated cholesterol in
the bloodstream), Norvasc (treatment of hypertension and angina), Zoloft (anti-
depressant for the treatment of depression, panic disorder, obsessive-compulsive disorder
in adults and children), Celebrex (treatment of osteoarthritis, adult rheumatoid arthritis,
acute pain and menstrual pain), Neurontin (epilepsy medicine), Zithro max (treatment of
certain types of bronchitis and pneumonia, for sinusitis and for ear infection), Viagra
(treatment of erectile dysfunction). Also, Zyrtec (treatment of year-round indoor and
seasonal outdoor allergies and hives), Bextra (arthritis medicine) and Xalatan (glaucoma
medicine used for the treatment of open-angle glaucoma and ocular hypertension)
(Datamonitor, 2007e).”

      Along with Pfizer, Barr Pharmaceuticals Ltd., and Alpharma Inc. represent
significant competitive rivals within the pharmaceuticals industry. By analyzing these
companies’ specific strengths, weaknesses, opportunities, threats, and finances, Teva’s
strategic positioning in relation to them becomes evident.
                                                                                 Teva     15

SWOT Analysis for Barr Pharmaceuticals Inc.

Broad Product Portfolio

        Barr has a product portfolio that includes both generic and branded drugs and
spans therapeutic categories like cardiovascular, central nervous system, dermatology,
diabetes, gynecology, rheumatology, oral contraceptives, oncology and diabetes. The
company markets more than 120 generic and 25 proprietary products within the U.S. and
more than 1,200 products internationally (Barr, 2008c). This includes more than 200
biopharmaceuticals on the market, including human insulin, interferons, human growth
hormones and monoclonal antibodies. (Datamonitor, 2007a). Their product diversity
helps them to market to a larger audience while minimizing risks pertaining to individual
products. In addition to its breadth, Barr has depth and expertise in the wo men’s heath
segment as a point of differentiation.

Strong R&D Capability

        Barr has made innovation through research and development a core competency
for their company. Last year over $248 million was invested into researching and
developing new products and CEO, Bruce L. Downey, has indicated that this figure will
be built upon in the year to come (SEC, 2008). This has been a key to bringing both
novel and successful products through approval processes and to the market. Barr’s
strong research focus continues to fill its pipeline with innovative products that are sure
to boost future revenue generation.

Strong API Capability

Similar to Teva, although on a smaller scale, Barr Pharmaceuticals has a strong active
pharmaceutical ingredient (API) manufacturing capability. Through its Croatian and
Czech manufacturing facilities the company produces over 28 different APIs for use in its
pharmaceuticals as well as for sale to other’s in the market. These facilities currently are
capable of developing and producing APIs including anti- infectives, cytostatics,
platinum-based APIs, and diuretics among others. The ability to control upstream
activities in its supply chain gives the company a strategic advantage over competitors
who fall victim to API market fluctuations or suppliers who charge a premium for their


Dependence on the US Market

       In 2006, the US market accounted for nearly 83.1% of Barr’s total revenues,
while Rest of World (ROW) markets accounted for only 16.9% of to tal revenues
(Datamonitor, 2007a). High dependence on the US market not only makes the company
                                                                                Teva     16

highly sensitive to regional demand dynamics, but also restricts its property and income
growth to the local economy (Datamonitor, 2007a). By investing the majority of its
resources into marketing to and serving their US customers, the company may be missing
revenue generating opportunities in other markets around the world such as Asia-Pacific
which is forecasted to experience a far higher compound annual rate of growth than the
US in years to come (Datamonitor, 2007c).

Dependence on few customers

        In addition to focusing on fewer markets, Barr is dependent on few customers for
its revenues. For instance, in 2006, four customers accounted for 22%, 13%, 12% and
10% of generic product sales. Although these contracts are profitable for the company,
tremendous risk is also associated with such a focused earnings base. Becoming content
with this situation could lead to crippling circumstances in the future if problems were to
arise downstream in the supply chain.

Lagging Financial Ratios

        Barr has a significantly higher P/E ratio than its competitors, industry, and the
market overall, however, this will likely dissipate given the company’s lackluster
financial performance ratios. Barr Pharmaceutical currently suffers from a relatively low
net profit margin, a lower return on assets, and lower return on equity compared with its
top rivals, its industry, and the S&P 500 (Google Finance, 2008). These figures indicate
the company’s need to better control its costs and more effectively convert the money it
has to invest into net income. It also shows an inability of management to generate profit
with shareholders’ money. Without substantial improvement, investors will like ly choose
to go to better performing competitors.

        Barr also has a significantly higher debt/equity ratio than its competitors and
industry averages which could lead to volatile earnings as a result of the additional
interest expense. Additionally, the company’s interest coverage (TTM) trails at 2.0
compared to the industry’s 9.58, making Barr even more vulnerable to steady interest rate
hikes by the Fed (Reuters, 2008). These issues make the company less attractive to
lenders as well which could further limit borrowing ability to finance future growth.


Oral Contraceptives

        Barr currently has a strong market position in the area of oral contraceptives.
Launches of drugs such as Jolessa, the generic version of the Seasonale extended-cycle
oral contraceptive, and Balziva, the generic version of Ovcon 35, have greatly expanded
the company’s generic portfolio (Datamonitor, 2007a). The US contraceptive market is
expected to almost double in worth between 2005 and 2012 to $10 billion. Oral
contraceptives alone are used by up to 82% of women in the US, and thus Barr's oral and
                                                                               Teva     17

other methods of contraception are well poised to gain from this growth (Datamonitor,

Loss of Competitor’s Patents

        The US generic drug market is expected to dramatically benefit from a number of
blockbuster drugs that are expected to lose patent protection in the next few years. These
drugs coming off patent have been valued at $22 billion in 2006, $27 billion in 2007 and
$29 billion in 2008 (Datamonitor, 2007a). Barr Pharmaceuticals has been active in court
with their legal team to expedite this process. These developments, in conjunction with
the fact that distributors get higher margins on generic drugs in compared to branded
pharmaceutical products, will provide plenty of opportunities for Barr to improve its
margins. These opportunities apply to Teva as well; however, since Barr focuses on
different therapies than Teva, the two companies will likely not have to compete directly
to a high degree.

FDA Approval of Pravastatin

        In November of 2006 the FDA granted final approval to Barr’s subsidiary,
PLIVA, to manufacture and market Pravastatin Tablets 10mg, 20mg, and 40mg, the
generic version of Bristol-Myers Squibb's Pravachol (Pravastatin Sodium) tablets. Since
then, the drug has brought in over $1.2 billion in US sales (Datamonitor, 2007a). PLIVA
is currently awaiting final approval for its Pravastatin tablets 80mg strength which would
boost revenues even more. This blockbuster drug will be a revenue generating
opportunity for some years to come.



         Significant litigation costs threaten the financial health and positioning of Barr
Pharmaceuticals. Litigation in the pharmaceutical industry has been on the steady rise,
particularly in the context of litigations involving the abbreviated new drug applications
(ANDAs) and new drug applications (NDAs) filed with the FDA. The has been involved
in approximately 4,950 personal injury product liability cases brought against it and other
manufacturers by plaintiffs claiming that they suffered injuries resulting from the use of
certain estrogen and progestin medications prescribed to treat the symptoms of
menopause. In addition, from 1997 to the present, Barr has been named as a co-
defendant with Bayer Corporation and others in approximately 38 class action complaints
filed in state and federal courts by direct and indirect purchasers of C iprofloxacin. In
addition to the money lost in legal fees and FDA fines, litigation incurs costs to Barr’s
image and money, time, and manpower must then be devoted to PR to try and counteract
negative press (Datamonitor, 2007a).
                                                                                   Teva     18

Rise in Counterfeit Medicines

According to the US Food and Drug Administration (FDA), the US pharmaceutical
industry is being increasingly threatened by a flood of counterfeit medicines. It estimates
that counterfeit drugs make up more than 10% of the global medicines market and has
reported that more sophisticated methods used to launch counterfeit drugs are making
counterfeiting more difficult to detect and investigate (Datamonitor, 2007a). These drugs
not only pose a health risk to citizens, since they do not go through the approval process,
but their proliferation could result in significant loss of the Barr sales as well as a loss of
public trust in pharmaceutical products. This threat is also of concern for Teva and its

Increasing Competitive Trends

        Barr Pharmaceuticals has been facing increasing competition against its specialty
category: women’s oral contraceptives. The company’s most significant competitor in
the oral contraceptives category is Watson Pharmaceuticals who markets and distributes a
sizeable portfolio of generic oral contraceptive products. Teva Pharmaceuticals is
another direct competitor in this category that currently markets two generic oral
contraceptive products manufactured by Andrx Corporation (Datamonitor, 2007a).

        A growing industry consolidation trend along with the recent expiration
of key drug patents and in the near future will encourage the generic pharmaceuticals
market to become even more fierce (Datamonitor, 2007a). This competition will force
Barr to fight for its market share and margins.
                                                                                   Teva     19

SWOT Analysis for Pfizer, Inc

Pfizer’s Size

         Pfizer’s strengths mainly come from its incredibly large size. This allows the
company leeway when launching new products, restructuring facilities, acquiring new
assets, etc. Small companies do not have the capability to do as much as Pfizer can.
Pfizer is essentially unrivaled in size, with its closest competitor GlaxoSmithKline
approximately $10 billion in annual revenue behind (Datamonitor, 2008).

        Pfizer’s size creates economies of scale for the company. They are able to
produce more products without spending significantly more money. By spreading the
fixed costs over more units, Pfizer enjoys above average profit returns.

Marketing Capabilities

       Though it has to do with its size, Pfizer’s marketing segment is one of the largest
and best forces in business today. Its sales division is in fact the largest in the industry.
Because of its skill and size Pfizer is a popular partner for smaller companies looking to
launch new medications, but do not have the resources to market them.



        Though it is large, Pfizer faces many of the same weaknesses that other
companies do. They are vulnerable to patent expiries and generic medicine, which
detract from their competitive advantage. This is especially true in regards to generic
competition. One of Pfizer’s most successful products, Lipitor, loses its patent in 2010.

Low Growth Product Areas

        Pfizer also is heavily concentrated in treatment areas that have not seen a lot of
growth recently. They focus on cardiovascular, central nervous system and infectious
disease markets, which are forecast to perform poorly in oncoming years. This is due to
unmet patient needs, a lack of innovative product and generic competition. High growth
pharmaceutical areas today are oncology and other biologic therapies. Pfizer’s lack of
expertise in this area could prove to hurt the company in oncoming years.

Lack of Successful Innovations

        Following Pfizer’s launch of Viagra, there have been relatively few new launches
within the last ten years. This hurts Pfizer and its image as a premier research and
development company. Given its focus on largely stagnant medication areas, it will be
                                                                                Teva        20

forced to speed up the R&D process to launch new drugs in the future. This is a riskier
strategy than Pfizer has typically used, and has the potential to not aid in sales growth
(Datamonitor, 2008).


Reduce Operating Costs

        Pfizer has already begun to reduce its operating costs by cutting its sales force.
Like most pharmaceutical companies, Pfizer has forecast a loss in revenues through 2012.
A cut in the size of the sales force will aid in spreading operating costs more thinly
throughout the company.

Mergers and Acquisitions

        Pfizer has historically not focused on mergers as much as research. This could
also be a way for Pfizer to break into faster growing markets of oncology and biologic
therapies. An acquisition of a biotech, generic or non-pharmaceutical company provides
opportunity for increased growth. This strategy has become extremely popular within the
2006/2007 year, with a dramatic increase in big pharmaceutical companies with little
biologic experience acquiring companies with monoclonal antibody technology.
Examples of this are AstraZeneca’s purchase of Cambridge Antibody Technology,
Merck’s purchase of GlycoFi and Abmasix, and GlasxoSmithKline’s purchase of
Domantis. If Pfizer employs this strategy it will be much easier and faster to break into
markets they have not historically been a part of.

Product Development

        Pfizer is extremely proficient at product development. The key they need to work
on is developing products that are in high demand at the moment. Currently, Pfizer
appears to be focusing significant efforts on the development of small molecule (their
specialty) targeted cancer therapies. The success of these products will be determined by
their ability to demonstrate a comparable efficacy to biologics but at a cheaper price and
via oral delivery. Pfizer has already secured approval for one drug of this type called
Sutent, and will proceed with indication broadening for this drug; they also reportedly
have 12 other small molecule targeted therapies in the R&D stage, with the majority of
these in early stage clinical trials (Datamonitor, 2008).


Near Patent Expiries

        Many of Pfizer’s patents are set to expire in the near future, with the main one
being the expiry of the Lipitor patent in 2010. They have a strong reliance on this brand,
which could prove to be a downfall when the medication is no longer exclusive.
Exposure to generic competition in this area is forecast to drive an absolute annual sales
                                                                                Teva      21

decline of -$8,664 million for this product franchise alone, equal to 56.1% of Pfizer’s
total revenues losses over the period 2006–2012 (Datamonitor, 2008).

Generic Erosion

       Going hand in hand with loss of patents, generic companies are becoming a large
problem for Pfizer. Brands that sell for a fraction of the price but essentially have the
same effects are undermining the success of current Pfizer products. Not to mention the
introduction of popular retail methods, including Wal-Mart’s $4 prescription program
which utilizes generic copies of traditional medications.

         Pfizer has been attempting to combat this problem with further R&D and new
product lines. The most recent trial is that of torcetrapib, which would have been the
successor to Lipitor once its patent expired. This medication could combine with Lipitor
to create a sustaining medication cycle. However, Pfizer was forced to end the clinical
trials of torcetrapib in December 2006 due to safety concerns. This shows Pfizer’s new
dependence upon product development, even with disregard to complete R&D. They
were forced to use a riskier strategy in order to launch a drug faster, though it did not
work out in the end.

Further Mergers and Acquisitions

         While it is a strategy to merge with companies to gain knowledge, it would be a
threat to Pfizer to merge or acquire another pharmaceutical company with no knowledge
to offer. Often companies use a merger to cover up deficiencies within the company; for
example Pfizer’s lack of oncology offerings. A merger that does not bring new
information or processes to benefit the company would not add sales growth for long. To
an extent the company would benefit from economies of scale, but it would not last.
                                                                              Teva       22

SWOT Analysis for Alpharma

Leading manufacturer

       Alpharma is the largest manufacturer of generic liquid and topical
pharmaceuticals in the US. Its human pharmaceuticals business is the leader in generic
pharmaceuticals products in the US and some markets in Europe. Additionally, it is
among the world’s largest producers of specialty antibiotics and key active
pharmaceutical ingredients. It is a leading global manufacturer and marketer of
pharmaceutical products for poultry, swine and cattle producers. It is also a leading
producer of vaccines for farmed fish (Datamonitor, 2007e).

Expansion of Active Pharmaceutical Ingredients business

        Alpharma is a leading producer of active pharmaceutical ingredients (APIs), with
more than 50 years experience in fermented antibiotics. The company’s ambition is to
take a leading role in shaping the future of the generic pharmaceutical industry. It is
currently extending its reach, entering an exiting era with expanded product offering
through a new partnership network and a broader technology platform. Alpharma is
recognized for its expertise in fermentation, specialized recovery and purification
technologies encompassing highly efficient processes and automated high performance
separation methods. An important element of our growth strategy is to develop and/ or
acquire technologically difficult manufacturing processes for high value APIs. R&D
competencies include the latest biotechnology know-how - from genetic engineering to a
broad range of automated purification techniques, in compliance with local
environmental laws and regulations.

       Alpharma manufactures API products in its plants in Oslo, Norway, which also
manufactures products for Copenhagen, Denmark and Budapest, Hungary. Each plant
includes fermentation, specialized recovery and purification equipment. In 2000, the
Copenhagen facility was expanded to support production of the drug vancomycin. Later,
in 2004, the expansion of the Budapest plant doubled the capacity of the facility for
vancomycin and established capacity for the production of three additional products
(SEC, 2007). In 2007, Alpharma finalized its collaboration with Hisun commencing the
construction of a new plant located in Taizhou, China for the manufacturing of
vancomycin. The Taizhou plant will be owned and operated by Alpharama and will
incorporate certain technology purchased from Hisun. The new facility is expected to be
completed in the first half of 2008 and substantially add to Alpharma’s strength in the
API business (SEC, 2007).

         Alpharma’s API capability makes it a direct competitor to Teva’s API business in
selling to pharmaceutical companies. In addition, the company’s API’s are used in the
creation of generic drugs that compete with those of Teva.
                                                                                Teva     23


R&D expenditures will negatively impact earnings in the short term

        Alpharma in its continuing businesses, expended approximately $140.3 million,
including the $60.0 million upfront payment to IDEA, $44.4 million and $26.9 million on
research and development efforts in 2007, 2006 and 2005. The company expects its total
research and development spending in 2008, including potential product licensing
milestone payments (including $77 million in potential payments for ketoprofen in
TRANSFERSOME gel) to be 10 to 20% higher than 2007. Such research and
development expenditures will reduce earnings in the short term (Datamonitor, 2007e).

Gross profits are dependent on a small number of products

        Seven products (KADIAN, CTC, BMD, Lasalocid, vancomycin, polymyxin and
bacitracin) in the aggregate constituted approximately 75% of Alpharma’s 2007 sales and
88% of gross profits. The loss of significant sales of any one or more of such prod ucts for
any reason, including any of the threats related to such products described in this SWOT
analysis, would have a material adverse effect upon the company (Datamonitor, 2007e).


European market

        As one of the few generics companies with a presence in both the US and
European markets, Alpharma is well positioned to take advantage of the strong European
market and economy. Many European countries are legislating to encourage the use of
generic drugs to reduce healthcare spending. Most o f these countries have low generic
penetration, and businesses in these markets are expected to see strong growth.
Alpharma’s position in France, for instance, will allow it to participate in the
development of this market, which currently has less than 5% generic penetration
(Datamonitor, 2007e).

Growth in generic pharmaceutical market

        “The global generic pharmaceutical market is approximately $40 billion in terms
of revenues. Over the next three to five years, the market is expected to grow 1015%
annually, outpacing the growth of the branded pharmaceuticals market. Future growth is
driven by patent expiration; focus on keeping drug costs affordable and aging populations
that need medication. Alpharma’s diverse product portfolio and international presence
ensures that it is well-positioned to take advantage of the growth expected” (Datamonitor,

       Alpharma’s very diverse product portfolio enables the company to take advantage
of generic growth in a wide variety of therapies. This could represent a threat to Teva if
new, more profitable opportunities arise in therapies unrelated with their specialty. At
                                                                                   Teva     24

the same time, Teva’s product focus allows them to focus their R&D and resources which
provides distinct strategic advantages as well.


International operations are subject to economic and political risks

    Alpharma’s international operations are subject to currency exchange fluctuations and
restrictions, political instability in some countries, and uncertainty as to the enforceability
of, and government control over, commercial rights.

        The company sells AH and API products in many countries that are susceptible to
significant foreign currency fluctuations. A majority of sales of API products are
denominated in U.S. dollars, increasing credit risk if local currencies devalue
significantly and it becomes more expensive for customers to purchase U.S. dollars
required to pay the company. In addition, a majority of API costs are denominated in
European currencies, thereby exposing Alpharma to exchange rate fluctuations between
the U.S. dollar and those European currencies (SEC, 2007).

        Complicating the issue in Europe, are the price pressure from imports of identical
products from lower priced markets (under EU laws of free movement of goods). These
imports are known as parallel imports. Parallel imports could lead to lower revenue and
operating income for Alpharma. The company’s international pharmaceuticals business is
also affected by general governmental initiatives to reduce drug prices, including price
controls or other restrictions on the industry. Parallel imports, governmental cost
containment and other regulatory efforts could lead to lower prices in certain markets,
including the UK, Germany and the Nordic countries, which are s ignificant markets for
Alpharma (Datamonitor, 2007e).

Extensive government regulations

        Alpharma is subject to government regulations and actions that increase the
company’s costs and could prevent it from marketing and selling some of its products in
certain countries. The research, development, manufacturing and marketing of the
company’s products are subject to extensive government regulation. Government
regulation includes inspection of and controls over testing, manufacturing, safety,
efficacy, labeling, record keeping, pricing, sale and distribution of pharmaceutical
products. While Alpharma does not keep records that segregate the cost of compliance
with these government regulations, in the aggregate, such regulations substantially
increase the cost of manufacturing, developing and selling of products (SEC, 2007).

        The U.S. and other governments regularly review manufacturing operations,
including API's plants in Oslo, Copenhagen and Budapest and Alpharma’s plants in the
U.S., where products are manufactured. These reviews have in the past and may in the
future result in regulatory concerns requiring a response from Alpharma. Failure to
adequately address these concerns could have a material adverse effect on the company,
                                                                                  Teva     25

including product approval delays, reduced production, and production interruptions
(SEC, 2007).

        Furthermore, non-compliance with applicable requirements from the government
can result in fines, recall or seizure of products, suspension of production or distribution.
Also, the government can ban individuals from providing services to Alpharma and
forbid the company from obtaining new drug approvals, resulting in current charges to
income and the potential for future loss of income and increased operating expenses
(SEC, 2007).

(side note to group members – although it is not in the SWOT analysis, like TEVA,
Alpharma has an API division which it is expanding. Since we are trying to relate the
competitive landscape to TEVA as much as possible I think we should say one of
Alpharma’s strengths is the expansion of their API division, which would affect TEVA.
In Alpharma’s SEC filing they stated that one of their biggest competitors in the API
business is TEVA. So let’s add this to our paper)

Competitors in Active Pharmaceutical Ingredients (API)

        In sales to large and small customers, price, quality and service are the
determining factors of success. Alpharma believes that its fermentation and purification
expertise and established reputation provide it with a significant advantage in generic
products. “Competition has increased in recent years on certain of its products, most
notably from Asian-based companies. The company believes API's principal competitors
are: Abbott Laboratories, Bristol- Myers Squibb Company, Zheijiang Medicine Co Ltd
Xinchang, Sandoz (LEK), Teva (Biogal), World Yanghen, Shanghai Pioneed and Livzon
– Fuzhou” (SEC, 2007).
                                                                                  Teva     26

Financial Comparison
Figure 1: Comparison of Key Financial Ratios

Financial            Teva        Barr   Alpharma        Pfizer   Industry S&P 500
Net Profit          17.78        5.68        -9.08      16.08        14.20     12.25
Margin %
Total Debt           .378        1.11         .425         .25          .46       .77
 to Equity
  Interest          31.63        2.75       -33.45       3.24        17.66     14.19
Return on           13.63        8.53        -8.18      10.93        14.06     20.82
 Equity %
Return on            7.71        4.54        -4.88       6.71          5.87     8.79
 Assets %
P/E Ratio           21.15       28.81         8.00      17.69        24.77     18.88
Employees         29,712        8,900        2,000     86,600      ----      ----
           Figures from and as of May 10, 2008

        Simple analysis of these financial figures helps to reveal the strategic positioning
of Teva Pharmaceuticals in comparison with its specific competitors, the pharmaceutical
industry, and firms belonging to the S&P 500. Teva holds the highest net profit margin
compared to its competitors, its industry at large, and the S&P 500. This indicates that
the company is effectively raising its profits while still controlling its costs. Teva’s total
debt to equity ratio is slightly below the industry average which demonstrates balanced
financing of growth between debt and equity. Further strengthening the company
financially is its interest coverage at almost double that of the industry, far ahead of key
competitors and the S&P 500. These figures help the company to avoid volatile earnings
as a result of the additional interest expense or hikes in interest rates. It also positions
them well to take advantage of lending opportunities to fund key growth initiatives in the
corporation. Teva’s return on equity figure ranks ahead of its competitors, but trails
behind its industry and the S&P 500. This reveals that Teva’s management is generating
substantial profit with shareholders’ money, but not as much as other opportunities in the
stock market. The company’s return on assets figure leads its direct competition and
industry, but still is behind the S&P 500. Overall, this indicates that management is
effectively converting the money it has to invest into net income. Finally, Teva’s price to
earnings ratio suggests that investors are expecting higher earnings growth from the
company in the future, more so than the market on the whole, but not quite as much as
the pharmaceutical industry. Despite Barr Pharmaceutical’s lackluster financial
                                                                               Teva      27

performance ratios, it has an especially high P/E ratio. This could relate to anticipation
for exciting products soon to leave its pipeline, however, without substantially improving
its other ratios, it is unlikely that investors will continue to value the Barr in such a
positive way.

        Overall, Teva is financially strong and healthy. It is positioned well both in
comparison to its competition, its industry, and the stock market as a whole. This
provides strategic and competitive advantage for the company despite intense industr y
rivalry and an uncertain global economy.
                                                                                Teva       28

Pharmaceutical Key Success Factors

        Key successful factors (KSFs) of any industry are factors that help the industry
leaders obtain an advantage. These factors define which companies will succeed and
which companies will not. They can be tangible or intangible, but whatever the nature
they are essential for success. KSFs commonly associated with the pharmaceutical
industry are strong product development, marketing expertise, low-risk action,
technology expertise, and economies of scale.

Strong Product Development

       The pharmaceutical industry is crowded with many products. To keep up,
obviously developing new products is important, but even more important is to
continually develop existing products. It is very expensive to develop an entirely new
drug which also does not guarantee a sale. The extension of existing product lines
provides the opportunity for the company to increase sales based on a brand that is
already familiar to buyers, therefore decreasing the marketing and sales expenditures.

         This also depends on the stage of the company lifecycle the firm is in. During the
early phases, the KSFs of drug development are speed, flexibility and innovation.
However, when the company shifts to maturity, sustainability, cost competitiveness and
reliability are important (Markovitch, 2005).

        Overall, companies who have the means to invest money into research and
developments of new and existing products have a significant advantage over companies
who do not. These companies continue to saturate the market with recognizable brands
with features that the consumer wants.

Marketing Expe rtise

       As mentioned before, there are many products and companies within the
pharmaceutical industry. This creates the need for a strong marketing and sales team.
Branding is everything when it comes to selling prescription or over the counter
medication. For example, Ibuprofen is a common pain reliever, but the most common
brand worldwide is called Nurofen. Nurofen achieve s stronger sales than any other brand
because Boots Healthcare has created strong awareness of the name (Markovitch, 2005).
Continuing additions to the brand line such as Nurofen Fast Relief and Nurofen Cold &
Flu have also boosted sales (Datamonitor, 2007f).

       Successful companies show an interest in improving their marketing and branding
of each product. They use this to increase sales and therefore their market position.
                                                                                 Teva      29

Low-Risk Action

        Pharmaceutical industry leaders focus on long-term research and extensions of
existing products rather than making changes to the company structure or portfolio.
Struggling companies tend to implement mergers and acquisitions in an attempt to make
a change to their financial position while successful companies focus on what needs to be
done to sell product. These lower risk actions enable the company to focus on sales
rather than financial data, and lead to a successful strategy.

Technology Expertise

         The use of technology is invaluable in any industry today, but particularly for
pharmaceutical. The correct use of technology can enable the company to produce
existing medications at a cheaper cost, research and develop new medications or
extensions to existing lines, and streamline the entire process through marketing and

       The success of a newly developed drug also rests heavily on technology. Each
drug must be scrutinized with the utmost detail and tested for every possible mistake. A
drug recall can significantly damage the brand and ultimately the company who produced
the product. Products are subject to the Federal Drug Administration (FDA) approval.

Economies of scale

        As with any industry, the size of the company has a lot to do with success. Large
companies can produce product on massive scales, therefore cutting down individual
production costs. This also aids in being able to afford research and development of
products as well as successful marketing of those products. Success in research can also
aid with extra finances to be used for clinical trials, which are an important step of any
product release. Some companies such as TEVA have introduced integration within their
production process to increase market share.

        Many successful companies also utilize globalization to combat potential threats.
This is a part of increasing economies of scale. It aids in competition and helps
companies maintain their market position.
                                                                               Teva       30

Value Chain Analysis

Primary Activities


      Teva has direct operations in over 50 markets in the Americas, Israel, Europe and
Asia. Its operational infrastructure includes 36 pharmaceutical manufacturing sites, 16
API sites and 17 generic research and development centers. The company primarily
operates through two segments: pharmaceuticals and active pharmaceutical ingredients
(API). Teva's biopharmaceutical operations develop, manufacture and market
biopharmaceutical products. The company's Lithuanian subsidiary develops and
manufactures generic recombinant protein bulk substances. Teva's biopharmaceutical
operations also include a 60% ownership interest in Tianjin Hualida Biotechnology
Company, a biopharmaceutical development and manufacturing company located in
China. During 2006, Teva's biopharmaceutical marketed product portfolio included
interferon alpha 2b, granulocyte colony- stimulating factor and human growth hormone.
Increasing generic rebates could have a material adverse impact on the company's
revenue base and profitability, which would affect the overall operations of the company
(Datamonitor, 2007g).

Outbound logistics

      Teva operates in other countries through its international products division, whose
focus is on pharmaceuticals, mainly Copaxone (multiple sclerosis therapy), Alpha D3
(bone metabolism product) and a line of cancer products. Sales to other countries are
through direct exports from Israel and sales from Teva's other manufacturing sites. In
addition, Ivax has subsidiaries in Argentina, Chile, Mexico, Peru, Uruguay and
Venezuela, which market and sell mostly branded non-proprietary pharmaceutical
products in their respective countries (Datamonitor, 2007g)

Marketing and Sales

         During 2006, the company’s sales in the U.S. were made to drug store chains,
drug wholesalers, mail order pharmacies, generic distributors, hospitals and affiliated
organizations and others, including governmental institutions and managed care
institutions. In Canada, Novopharm markets generic products to wholesalers and retail
chains reaching approximately 7,500 pharmacies. Novopharm also has a hospital sa les
division, which offers 50 intravenous products and covers approximately 900 hospitals
throughout Canada (

        Tremendous investments must be made in marketing to gain and maintain market
share. All drugs must pass FDA required testing before they can be manufactured and
marketed. With regards to generic versions of products, of which Teva relies on heavily
for their sales, a critical window exists between when a proprietary product loses its
patent and generic manufacturers get their products approved. Those who succeed in
                                                                               Teva     31

being first to market enjoy a significant marketing advantage, particularly if the company
is able to obtain the 180-day period of market exclusivity for the US market provided
under the Hatch-Waxman Act (SEC Info, 2008). A knowledgeable sales force, strong
relationships with physicians and pharmacists, as well as integrated marketing
communications are all necessary to gain and maintain a strong market position.
Incredible attention must be placed to brand management to maintain the brand equity of
both family and individual brands. A capable and responsive public relations team is
essential for mitigating threats to the company’s image such as with product recalls.

        In North America, the API division has marketed its products through Teva’s
subsidiary Plantex USA. Majority of Plantex USA’s customers are generic dosage form
manufacturers located in the U.S. and Canada. In Europe, Teva’s subsidiary Plantex
Chemicals BV is responsible for marketing to European customers. The API division’s
primary customers in Europe are generic pharmaceutical companies. In Asia, Latin
America, Australia and New Zealand, Teva sells APIs through either local subsidiaries or
local distributors. The company has established a subsidiary in Japan (

         Part of Teva’s success marketing its products has been due to its well-organized
and effective marketing channels. The marketing of generic pharmaceutical products in
the U.S. is conducted through Teva USA. In 2007, Teva’s sales in the U.S. through
different marketing channels were 45% drug store chains, 27% drug wholesalers, 14%
managed care organizations, 5% generic distributors, and 9% government facilities and
others (SEC Info, 2008). The company’s U.S. sales organization consists o f the Teva
Generics group and the Teva Health Systems group, aligning the sales force with the
customer base. The Teva Generics sales force calls on purchasing agents for chain drug
stores, drug wholesalers, health maintenance organizations, mail order pharmacies,
pharmacy buying groups and nursing homes. The Health Systems group handles unit
dose products and finished-dosage intravenous pharmaceutical products that are used
primarily in institutional settings. It focuses on the intravenous products within the
pharmaceutical market and key institutional accounts. Account including: hospitals and
clinics for critical care, government systems, hospital group purchasing organizations,
managed care groups and other large healthcare purchasing organizations. Teva’s US
wholesale selling efforts are supported by professional journal advertising and exhibitions
at key medical and pharmaceutical conventions. From time to time, Teva bids for U.S.
government-tendered contracts as well (SEC Info, 2008) .

        Teva’s International Group handles countries outside the U.S., Canada and
Western Europe, excluding Hungary. These markets are among the fastest growing
pharmaceutical markets in the world, and include eight of the world’s top ten largest
generic pharmaceutical markets (based on IMS data), such as China, India, Brazil,
Mexico, Russia, Japan, Turkey and Korea (SEC Info, 2008). Teva currently has a limited
presence in these regions which presents excellent opportunity for future growth. These
international operations may range from pure generic markets (where a pharmacist is
permitted to make substitution for branded products) to branded generics (which offer the
potential of higher margins but also higher marketing costs) and government-funded
health plans (SEC Info, 2008). All of these markets limit pharmacists’ ability to provide
products other than those prescribed by doctors, making marketing efforts to physicians
                                                                                Teva     32

especially important for Teva. The broad portfolio of globally manufactured finished
products and lower prices through economies of scale that Teva brings to these markets
help it to better position itself among both domestic and other international competitors.

         Teva’s International Group pharmaceutical sales in these regions reached $1.4
billion in 2007, with 41% in Latin America (including Mexico), 26% in Israel, 26% in
Central and Eastern Europe (CEE) and 7% in other countries (SEC Info, 2008). In Latin
America, Teva markets a broad portfolio of innovative, branded generic, non-branded
generic, respiratory and OTC pharmaceutical products. Mexico, Chile, Brazil, Argentina
and Venezuela are the largest markets in this region, with substantial local
manufacturing. Their historical absence of effective patent protections for innovative
drugs and their reliance on generic and branded generic products have made marketing to
these countries easier for Teva than in other markets such as the US (SEC Info, 2008).

        Teva’s network of hospital and institutional channels also represent a marketing
advantage for the company. In 2007, Teva continued its focus on sales of generic
intravenous products through these channels, mostly in the U.S. and certain countries in
Western and Eastern Europe and Latin America Teva’s portfolio, combining solids with
injectables, differentiates it from companies offering solely an intravenous product
portfolio and provides its customers with an attractive commercial model, including
customer support and service as well as supply deliveries (SEC Info, 2008). This point of
difference has helped the company to develop a strong leadership position in the market.


        Teva is the leading non- governmental supplier of health care products and
services in Israel. In the domestic market, Teva markets a range of health care products,
including generic pharmaceuticals, over-the-counter and consumer health care products,
proprietary pharmaceuticals, biopharmaceuticals, active pharmaceuticals, veterinary
pharmaceuticals, hospital supplies, dialysis equipment and disposables, diagnostics and
home care services (Datamonitor, 2007b).

        In this market, Teva is involved in the marketing, promotion, selling and
distribution of a range of healthcare products and services. The company supplies
healthcare services for the geriatric market. In Israel, the company’s main customers
include healthcare funds, hospitals, private pharmacies and pharmacy chains. Sales of
Teva’s products in Israel are made through its distribution company, Salomon, Levin and
Elstein, Ltd., which sells directly to institutional customers, as well as to the private
pharmacies and chains (

Support Activities

Procurement and Technological Development

     “The acquisition of Sicor strengthened Teva's API division expertise in the
chemistry of steroids and high- potency production. In addition, Ivax has provided Teva's
                                                                               Teva     33

API division with an additional 30 APIs and access to new technologies, mainly plant
extraction technology. The API division produces active pharmaceutical ingredients
worldwide in 16 production sites in the US, Israel, Hungary, Italy, India and Mexico.
Ivax has two API manufacturing sites in Puerto Rico and the Czech Republic
(Datamonitor, 2007g).”

        “Teva has been engaged in innovative research and development for over two
decades now. During this period, it has made significant progress, mainly in two
therapeutic fields: central nervous system (CNS) and autoimmune (AI) diseases.
Oncology is recently emerging as a potential new area (see Table). These efforts
culminated in 2 innovative products introduction into global markets: Copaxone® (
glatiramer acetate) for MS and Azilect® for Parkinson's disease (PD) (Teva

         “Most of the current pipe- line projects are based on research performed in the
leading research institutes and start-up companies in Israel. With the acquisition of Ivax
at the beginning of 2006, Teva's Innovative pipe-line has been enriched with several new
molecules in clinical and pre-clinical stages of development. Attempts have been recently
initiated towards licensing- in of promising products from additional non-Israeli sources
(Teva Pharmaceuticals).”

        Teva’s API division has developed and acquired an expertise in specialized
technologies, such as fermentation processes, high potency and the production of peptide
API. This expertise enabled the API division to support launches of pravastatin and
simvastatin in the United States in 2006 and also enabled Teva to sell fermentation
products, such as lovastatin, simvastatin, pravastatin and tobramycin. In addition, through
the establishment of joint ventures, Teva is also supplying various peptides, such as
desmopressin, calcitonin, octreotide and others to its customers (
                                                                                  Teva     34


        Sales of Teva’s products in Israel are made through its distributio n company,
Salomon, Levin and Elstein, Ltd., which sells directly to institutional customers, as well
as to the private pharmacies and chains (


       Teva manufactures generic pharmaceutical drugs, proprietary branded
pharmaceuticals, biopharmaceuticals, veterinary pharmaceutical products and active
pharmaceutical ingredients, leading it to be one of the primary generic drug companies in
the world and the leading generic drug manufacturer in the US (Datamonitor, 2007g).


        Teva is a global pharmaceutical company based out of Israel. The company
upholds a vision to become one of the world's leading pharmaceutical companies, by
being recognized as the undisputed leader in the global Generics industry and by
developing a global franchise in selected Innovative products derived from Israeli science

       Teva believes in the strategic depth of vertical integration, differentiating itself by
balancing its portfolio with Generic and Innovative activities, combining local c ustomer
responsiveness with a “global edge” and by effectively managing increasing profitable
growth and intricacy (

        Teva’s success lies in the leadership of their management, the skills and devotion
of their people, the quality of their offerings and their focus on customers and patients.

Core Values (Teva Pharmaceuticals)

           Think globally and act locally
           Create value by cross leveraging our global organization's strengths
           Provide leadership in the communities we serve
           Always be better than the competition

       Strategic Discipline
            See the big picture and use a long term approach
            Deliver results on strategic goals
            Think and act strategically on global and local basis

       Operational Excellence
           Do more and better for less, rather than Either-Or
                                                                             Teva    35

           Reward and recognize the implementation of strategic innovation an
              creative thinking

       Openness to Change
           Encourage directness and open communication channels
           Be fast and flexible
           Translate challenges into opportunities

Strategic Goals (Teva Pharmaceuticals)

       Sustained Profitable Growth

       Industry & Market Leadership
           To become first or second in each significant market to Teva.
           A leader in affordable, Generic and selected Innovative pharmaceutical
           Strong "First to Market" and "Entire Basket" strategies to ensure
              competitive advantage.
           The leader in the globalizing Generics industry.

           Leverage global strengths in Generic and Innovative activities.
           Develop a global franchise for selected Innovative products by leveraging
              Israeli science.
           Take an active role in leading the process of globalization in the Generics
           Local responsiveness and accountability combined with global efficiency
              and effectiveness.
                                                                                   Teva    36

    VRIN Analysis

   Key Success Factors                                         V         R         I           N
       Research & Development                                                               
       Product patents and                                                                  
       Marketing expertise                                                                  
       Economies of Scale                                      
       Technology                                                                           
       Supply chain
                                                                                             

              VIRN testing specifically shows whether or not our current capabilities are
    sustainable competitive advantages. Teva's position as one of the largest suppliers of
    active pharmaceutical ingredients provides it with the competitive advantage of being
    vertically integrated. The company is less dependent on outside sources than most, if not
    all, of its generic drugmaker peers, which helps keeps cost of production low. Most API
    sales are internal, and external sales are enabling Teva to realize better production
    economies of scale, thereby lowering its internal API costs, while API prices charged to
    third parties also positively impact the gross margin (Seligman, 2006). Teva’s biggest
    advantage is in R&D and direction and focus within R&D will help improve the
    company’s growth.

    Core Competencies
            Teva has many of the KSFs for the pharmaceutical industry. They have a
    competitive advantage over other companies based on their ability to perform under those
    specific guidelines. Teva’s core competencies are as follows:

                  Research & development
                  Product patents and exclusivity
                  Marketing expertise
                  Technology
                  Supply chain management
                                                                                   Teva     37

SWOT Analysis for Teva
        *TEVA Pharmaceutical’s current standing directly reflects the most recent SWOT
Analysis from Datamonitor, viewed at Therefore, all the information
presented below is shown exactly as it is written in the Datamonitor SWOT Analysis report.

       “Teva Pharmaceutical Industries (Teva) is a pharmaceutical company engaged in
the development, production and marketing of generic and proprietary branded
pharmaceuticals and active pharmaceutical ingredients. The company is one of the
leading generic drug companies in the world, which enhances its market penetration
opportunity that provides it with a competitive advantage. However, reforms in the
healthcare industry could affect the top line and bottom line of the company. ”

Figure 4: Teva SWOT Analysis
Strengths                                       Weaknesses

Leading market position                         Narrow customer concentration
Copaxone                                        Patent infringement suits
Strong R&D capabilities
Strategic alliances

Opportunities                                   Threats

Product approvals                               Healthcare industry reforms
Acquisition of IVAX                             Pricing pressures
Expanding generics market                       Increasing rebates on generic drugs


Leading Market Position

        Teva is one of the leading generic drug companies in the world. Teva
Pharmaceuticals USA, the company's principal subsidiary, is the leading generic drug
manufacturer in the US. Teva USA markets about 315 generic products in approximately
1,079 dosage strengths and packaging sizes in the US. In 2006, Teva enhanced its
position as the US generic market leader in total prescriptions and new prescriptions, with
total prescriptions increasing from approximately 358 million in 2005 to approximately
416 million in 2006, representing 18.4% of total generic prescriptions.

       Through Novopharm, Teva manufactures and markets generic prescription drugs
in Canada. Novopharm is the second largest generic drug company in Canada with a
product portfolio covering approximately 84% of the Canadian generic market's sales
requirements. Novopharm's portfolio includes 170 generic products, which are sold in
over 700 dosage forms and packaging sizes.
                                                                                Teva     38

         Teva also has a strong market position in the UK, The Netherlands and Italy. The
company is the largest non- governmental supplier of health care products and services in
Israel. Teva's active pharmaceutical ingredients (API) division has a strong market
position in the production of many major chemicals for generic pharmaceuticals. The API
division has established a leading market position in the sale of fermentation products
such as lovastatin, simvastatin, pravastatin and tobramycin.

       The company's leading market position enhances Teva's market penetration
opportunity that provides it with a competitive advantage and thus, increases its
bargaining power.


         Copaxone, the multiple sclerosis (MS) drug of Teva, attained the blockbuster
status in 2005, with its sales crossing the $1 billion mark. Copaxone is the first
blockbuster drug of Teva. This MS drug continued its strong performance in 2006. In
2006, in- market global sales of Copaxone reached $1,414 million, an increase of 20%
over 2005. Copaxone continues to be one of the leading therapies for MS in the US, in
terms of both new and total prescriptions. US sales of Copaxone continued to increase in
2006, reaching sales of $916 million, an increase of 17% compared to 2005. Furthermore,
Copaxone had 31.2% share of new prescriptions and 29.9% share of total prescriptions in
December 2006.

        In- market sales of Copaxone outside the US, primarily in Europe, increased 26%
to $498 million in 2006, driven by significant sales increases in Teva’s principal
European markets (the UK, France and Germany, the largest MS market in Europe), as
well as Russia, Mexico and certain other Latin American countries.

        Copaxone has been approved for marketing in 48 countries worldwide, including
the US, Canada, Israel, 22 European Union countries, Switzerland, Australia, Russia,
Mexico, Brazil and Argentina. Strong performance of Copaxone strengthens the
financial performance of the company, which allows it to expand its revenue base as well
as profitability.

Strong R&D capabilities

        DSP has a strong research and development (R&D) capabilities. The company's
R&D expenses increased by 34.1% in fiscal 2006 over the previous year. The company’s
R&D activities resulted in many FDA approvals. In 2006, Teva USA received 28 final
generic drug approvals and 15 tentative approvals. The 15 tentative approvals received
were for generic equivalents of the following products: Depakote, Actos, AdenoScan,
Aciphex, Zofran (tablets and OD tablets), Sarafem, Protonix, Cozaar, Hyzaar, Lotrel,
Risperdal, Avelox, Focalin and Wellbutrin XL (150 mg).

        Strong R&D is also reflected through the products that the company has in its
pipeline.Teva’s key achievements in 2006 included the initiation of Phase 2 clinical trials
                                                                               Teva       39

of Edratide Acetate (TV-4710) for the treatment of patients with Systemic lupus
erythematosus (SLE); Laquinimod, which is in Phase 3 for the indication of relapsing
multiple sclerosis; Glatiramer acetate, Talampanel and Rasagiline mesylate, which are in
Phase 2 stage for the treatment of neurological/neurodegenerative diseases; and Ste m Ex
(with Gamida-Cell), which is in the Phase 3 stage of drug development process for
Hemato-oncological indications. The company’s strong R&D base enables it to gain
competitive advantage and drive the company’s product portfolio, which increases the
revenue generation capacity.

Strategic alliances

         Teva has alliances with pharmaceutical and biotechnology companies and other
collaborators to retain an appropriate level of ownership of products currently in
development. In 2006, Teva entered into an agreement with Impax and Anchen
Pharmaceuticals for the marketing of the generic version of Wellbutrin XL (bupropion)
tablets, 300 mg., the branded product marketed by GlaxoSmithKline.
In accordance with the agreement, Anchen took the regulatory steps necessary to permit
Impax to obtain final FDA approval of Impax’s ANDA for this product, and for Teva to
sell the product within Anchen’s 180-day exclusivity period.

       In September 2006, Teva and Procognia entered into a collaboration agreement
covering two biopharmaceuticals, for which Procognia (Israel) will supply Teva services
and access to its proprietary glycoanalysis technology on an exclusive basis. During the
same month, Teva and Protalix Biotherapeutics signed a collaboration and licensing
agreement for the development of two proteins, using Protalix's plant cell culture

        In March 2007, Teva entered into an agreement with Biovail Corporation
regarding Bupropion Hydrochloride Extended-Release Tablets, the generic version of the
antidepressant Wellbutrin XL Tablets, for the US market. In addition, Teva received a
license to sell Bupropion HCl ER tablets, 150 mg, in 2008 and possibly earlier under
certain circumstances.

        Such alliances provide opportunities to the company such as entering ne w
markets, new research ideas for novel therapeutics, thereby improving Teva’s internal
drug discovery capabilities and also enabling strong growth prospects for the future.


Narrow customer concentration

        A significant share of the company's revenues is accounted by a few US drug
wholesalers, retail drug chains, managed care purchasing organizations, mail order
distributors and hospitals. Moreover, consolidation in recent years has sharply reduced
the number of companies in the company's customer segments. As a result of
consolidation, large players with considerable bargaining power have emerged. These
                                                                                Teva    40

large players have begun to use their size to drive down prices.

        Furthermore, large buying groups representing independent retail pharmacies
have emerged in the last few years. These buying groups are using their bargaining power
to extract price discounts from manufacturers. High dependence upon a few customers
would adversely affect the margins of the company.

Patent infringement suits

        The company faces a number of patent infringement suits. Teva seeks approval to
market generic versions of products whose patents, according to the company, are
invalid, unenforceable, or would not be infringed by its products. The company continues
to market generic versions of several branded products despite litigation with companies
which market them. In August 2006, the company settled a patent infringement suit filed
by The Purdue Frederick Company relating to its generic version of Purdue's OxyContin
(oxycodone HCL) tablets pending in the US. As a part of the settlement, the company
agreed to cease sale of oxycodone products.

       In December 2006, pursuant to agreements with Anchen Pharmaceuticals and
Impax Laboratories, Teva commenced sales of Impax’s 300 mg bupropion hydrochloride
extended-release tablets, which are AB-rated to Biovail’s Wellbutrin XL tablets, 300
mg.Wellbutrin XL tablets, 300 mg, marketed by GlaxoSmithKline. Following the launch,
Biovail initiated proceedings in the United States District Courts for the District of
Maryland and the District of Columbia against the FDA seeking injunctive relief.

         Adverse outcome in patent infringement suits pending against the company would
force it cease sale of certain products, which in turn would adversely affect its revenues.
This may also adversely affect consumer perception of the company thus posing a serious
threat to the brand image of the company.


Product approvals

       Teva received approval for many products from the FDA during 2006.Teva USA
received 28 final generic drug approvals and 15 tentative approvals.The 15 tentative
approvals received were for generic equivalents of the following products: Depakote,
Actos, AdenoScan, Aciphex, Zofran (tablets and OD tablets), Sarafem, Protonix, Cozaar,
Hyzaar, Lotrel, Risperdal, Avelox, Focalin and Wellbutrin XL (150 mg.). A tentative
approval letter indicates that the FDA has substantially completed its review of an
application and final approval is expected once the relevant patent expires, a court
decision is reached or the 30-month stay lapses during the year. In 2006, Teva received
300 generic approvals, corresponding to 27 new compounds in 36 formulations.

       Teva is also seeking approval for ProAir HFA Breath Actuated Inhalation
Aerosol, based on the Easi-Breathe technology, for which it received an approvable letter
                                                                                 Teva    41

from the FDA in December 2006. The company expects to launch this product in late
2007 or early 2008. In 2007, the company received approval for Generic Focalin Tablets,
Alprazolam ER Tablets, generic dostinex tablets and generic UNIRETIC tablets. With so
many product approvals during the year, the company is very well poised to tap this
opportunity, enabling it to capture the market share as well as expand its revenue base.

Acquisition of IVAX

        Teva completed the acquisition of Ivax in January 2006. Ivax markets generic and
proprietary and brand name products worldwide. Ivax has substantial expertise in the
development, manufacture and marketing of respiratory drugs, primarily for bronchial
asthma, delivered by metered-dose and dry powder inhalers. The combined company,
which will operate under the Teva name, would have a presence in over 60 countries

       This acquisition, Teva's largest to date, enhances its leadership position in the US,
expands its strong presence in Western Europe and significantly boosts Teva's reach in
Latin America, Russia and other Central and Eastern European countries.

Expanding generics market

       A number of blockbuster drugs are expected to lose patent protection in the next
few years, boosting the US generic drug markets to new heights. The blockbuster drugs
coming off patent are valued at $27 billion in 2007 and $29 billion in 2008.

         With a number of blockbuster drugs expected to lose patent protection in 2007
and 2008, the generic markets would grow rapidly, providing an opportunity to generic
pharmaceutical companies such as Teva to expand its product portfolio and revenue base


Healthcare industry reforms

        Increasing expenditures for healthcare has been the subject of considerable public
attention globally. Both private and governmental entities are seeking ways to reduce or
contain healthcare costs. In many countries where Teva currently operates,
pharmaceutical prices are subject to regulation.

        In the US, numerous proposals that would effect changes in the US healthcare
system have been introduced in Congress (as well as in some state legislatures), including
expanded Medicare coverage for drugs, which became effective in January 2006. Similar
measures are being taken or introduced throughout Western Europe, Israel, Russia and
certain countries in Central and Eastern Europe.
These changes may cause delays in market entry or adversely affect pricing and
                                                                               Teva     42

        In the US, the recently enacted Deficit Reduction Act established a new standard,
the average manufacturer price, as the benchmark for prescription drug reimbursement in
the Medicaid program, eliminating the previously used average wholesale price standard.
The Act also changed the federal upper limit on payment for generic drugs. Payments to
pharmacies for Medicaid-covered outpatient prescription drugs are set by the states.
Federal reimbursements to states for the federal share of those payments are subject to
this federal ceiling, which, effective January 2007, was 250% of the average
manufacturer price for generic drugs.

         This price limit may have the effect of reducing the reimbursement rates for
certain medications that Teva currently sells, which could affect the top line and bottom
line of the company.

Pricing pressures

        The generic pharmaceutical industry is a low- margin, commodity-style, market. It
does not offer the higher- growth, higher- margin, longer-term visibility opportunities of
the branded or proprietary markets. This is because the products sold have little, if any,
marketing advantage versus peers, and limited barriers to entry.

        In general, the generics industry has been experiencing pricing pressure due to
additional competition from authorized generics and low-cost Indian manufacturers that
are competing in the US with historically low prices.

        Rising pressure could tighten the margins of generic pharmaceutical companies
such as Teva, which also produces generic drugs and adversely impact their overall
revenue base and profitability.

Increasing rebates on generic drugs

        The high cost of prescription drug coverage has resulted in nearly every US state
looking at ways to lower healthcare costs. Moreover, many states in the US are facing
budgetary challenges that pose a threat to Medicaid funding levels to hospitals and other
providers. Pharmaceutical manufacturers to State Medicaid programs are required to
rebate 11% of the average manufacturer price for generic drugs and 15.1% for proprietary
drugs. Several US states have focused on increasing rebates for generic drugs. Some
generic manufacturers report a loss on up to 40% on the products sold through a
Medicaid program with rebates.

       Increasing generic rebates could have a material adverse impact on the company’s
revenue base and profitability, which would affect the overall operations of the company.
                                                                                Teva     43

Recommended Strategy for Teva
Strategic Overvie w

    Given the nature of the industry, global market trends, and the key success factors and
core competencies at Teva’s disposal, a differentiation strategy applied to both their
generic and proprietary product lines will best position the corporation for sustainable
competitive advantage and future success. Strategic recommendations include the

      Successfully develop and market generic products before competitors
      Continue to focus on the aging population target market
      Continue to investment in biogenetics and biopharmaceuticals

To implement this strategy, Teva will need to implement the following:

      Increase investment in R&D by 7.5% of sales aimed at generic and
      Continue to focus on therapeutic fields of central nervous system diseases,
       autoimmune diseases, respiratory diseases, and oncology
      Continue to vertically integrate and utilize API capabilities

         Teva’s differentiated focus has provided the company with a strategic advantage
in the industry. It has maintained its market leadership as one of the top producers of
generic pharmaceuticals and an innovator in proprietary pharmaceuticals because of its
effective and efficient research, development, manufacturing, distribution, and marketing
of focused products serving aging populations around the world. This target market
segment represents one of the biggest users of pharmaceutical products and is expected to
double globally within the next several decades (Reville, 2007). The company primarily
concentrates on developing generics and a few branded products in the therapeutic fie lds
of central nervous system (CNS) diseases, autoimmune (AI) diseases, respiratory
diseases, and oncology, all of which are of special interest to elderly consumers (Teva,
2008a). This focus allows the company to compete with industry giants despite its
relatively smaller size and available resources. The broad product portfolios of global
pharmaceutical behemoths such as GlaxoSmithKline, Pfizer, and Johnson & Johnson
have become increasingly exposed to patent expiries and generic sales erosion
(Datamonitor, 2008). Teva’s focused approach allows it to focus its resources, research,
manufacturing, and marketing capabilities to provide higher quality products faster and
more efficiently to the market than these competitors.

        In looking to the future, Teva must also continue to invest in future opportunities
in biopharmaceuticals; specifically, biogenerics. Biotechnology is expected to
revolutionize the pharmaceutical industry through its ability to tailor treatments to
individuals according to their unique conditions and genetic makeup. This will represent
the ultimate in differentiation and Teva will want to be investing in research and
                                                                                   Teva     44

development in this field in order to position itself to exploit this opportunity in the near

         In order to meet the demand generated by marketing of Teva’s products, the
company will also need to further develop its active pharmaceutical ingredients in order
to better control their supply chain through vertical integration. Full and effective
utilization of recently acquired production capacity will also support the tremendous
growth that Teva is forecasted to experience.
                                                                                Teva     45

Increased R&D for Generics and Biopharmaceuticals

         We recommend an increase in R&D expenditures from 6.2 percent of sales to 7.5
percent of sales for the next three years to be focused on generics and biopharmaceutical.
Teva’s leadership has expressed a desire to increase R&D spending in their filings and
this figure has been stated as a ceiling for how high they would be willing to go (SEC
Info, 2008). Our situational analysis of the market, both its opportunities and high
competitive rivalry, has demonstrated the necessity for the company to use this higher
figure. After this three year period, the company will be able to make adjustments to
R&D expenditures as necessary.

        Based on our EVA estimate of next year’s earnings (Appendix I), this increase
would translate into a 39% increase in R&D expenditures from $581 million in 2007 to
over $809 million in 2008. This increase, although substantially large, is shown to be
reasonable when compared with the 60% increase from 2005 to 2006 (SEC Info, 2008).
The chart below demonstrates the direct historical correlation that exists between percent
increases in R&D expenditures and percent increases in revenues. As R&D goes up, so
do revenues and the same is true for the opposite. This relationship justifies such an
investment and supports our strategy.

       Figure 3: Revenues based on R&D Expenditures
                     70%                                       Expenditures

                     60%                                       Revenues

                             2004    2005    2006   2007
        The resulting benefits will help Teva to maintain its differentiation and leadership
position in the industry. Increased focus and support for generic R&D will help the
reverse engineering process involved in taking preexisting branded drugs and creating
generic equivalents. Better research will also help expedite the approval process for these
generics which will help them get to the market faster, gaining first to market advantages.
Finally, increased R&D for biopharmaceuticals represents a valuable investment for this
cutting-edge future opportunity.
                                                                                   Teva   46


        Within the generic pharmaceuticals industry, companies can gain a tremendous
competitive advantage by being the first to bring their generic product to market. This is
especially true in the US market, which is currently the largest and most profitable and
which many believe has the most stringent approval process. Through the Paragraph IV
provision of the Hatch-Waxman Act of 1984, the company that is first-to-file their
application after a brand drug patent is successfully challenged is rewarded a 180 day
exclusivity period whereby competitors can’t market their generic equivalents
(Datamonitor, 2007a). The advantage is that the company can enter the market as a
monopoly allowing it to charge a premium on its product and establish critical marketing
and distribution channels ahead of competitors.

        Gaining approval for generics relies heavily on effective R&D. The Abbreviated
New Drug Application Process allows the generic drug submissions to bypass the drug
discovery, animal testing, and clinical tests by only having to demonstrate that their
generic product does the same thing for patients as the branded version (Barr, 2008c).
This process still can take up to 4 years and the key driver for expediting the process is
R&D, which is why it should be the focus of strategy and funding.

        Teva has shown itself to be very proficient in reverse engineer, developing
generic equivalents, completing research and testing, and passing regulatory requirements
before competitors to receive first to market advantages. Out of the 160 current filings it
has submitted to the FDA, 92 are Paragraph IV challenges to void branded patents earlier
than their scheduled expiration date and 49 have first-to-file status (Teva, 2008b). Teva
has been far more successful than its main generic competitors in the US at both filing for
approvals as well as securing first-to- file status as demonstrated in the chart below.

       Figure 4: ANDAs Pending

                                                                                 Teva     47

        This dominance in taking generic drugs to the market is true for its international
operations as well. Well supported R&D will help Teva to continue to fine-tune these
processes and stay ahead of competition.

Biopharmaceuticals & Biogenerics

         Pharmaceutical biotechnology is the cutting edge in pharmaceuticals research,
contributing to design and delivery of new therapeutic drugs, the development of medical
tests, and the beginnings of gene therapy for hereditary diseases. This science allows
drug developers to tailor treatments to an individual’s unique genetic makeup. In this
way, biopharmaceuticals represent the ultimate in differentiation for products and
promise tremendous potential revenues.

        In many ways, however, this is also a risky business venture. Given the relative
infancy of this industry and its technology, many countries lack the appropriate approval
processes for companies to market biopharmaceuticals. Not only can this impede a
corporation’s ability to obtain funding for research, but it also limits the market for
resulting products. Most importantly for Teva, biogenerics lack FDA approval processes
in the US market, which is currently the largest and most profitable. This is reason for
concern since Teva mainly focuses on generic pharmaceuticals and thus will want to
focus on the generic versions of biopharmaceuticals as well. Congress is currently in
hearings to create a pathway, but no legislation has yet been passed. An approval process
is imminent, and Teva should prepare now rather than later (SEC Info, 2008).

         Though it is high risk, biopharmaceuticals also have the possibility for very high
returns. It is estimated that they will be nearly one-third of the pharmaceutical industry’s
revenues by the year 2015 (Teva, 2008c). This is a huge segment of the market, and one
that is directly in line with Teva’s proposed differentiation strategy. In fact, over $40
billion in sales is expected to be exposed to biogneric competition in the next ten years
(SEC Info, 2008). As the current leader in the generic pharmaceuticals market, it is a
conservative estimate that, given substantial investment in R&D, Teva would be able to
capture at least ten percent of the biogenerics market once approval processes are in
place. This would translate into over $400 million in potential revenues.

         Teva has several advantages over competitors when it comes to
biopharmaceutical R&D. First, the company has acquired key players in the
biotechnology field, which increases their intellectual capital in this area. With the
assimilation of these acquisitions, Teva captures the personnel and knowledge necessary
to utilize emerging technologies. An example of this was the $400 million acquisition of
the American biotech firm, CoGenesys, in February of 2008. Through this acquisition,
Teva has added a world-class biotechnology research team, advanced technological
platforms and an innovative pipeline addressing a broad spectrum of therapeutic
categories (SEC Info, 2008). This is especially important at the moment because Pfizer
Inc, the world's biggest drugmaker, is planning to invest $297 million to establish a new
biotech plant in Ireland for the production of experimental medicines (Hirschler, 2008).
Teva needs to maintain its position in respect to its competitors to avoid obsolescence.
                                                                                  Teva     48

        Teva has also formed several key partnerships with research companies in Israel.
These strategic alliances both help mitigate the company’s risk and increase their
research and development resources. Two such partners are Protalix and Procognia. The
Protalix collaboration began in October 2006, and brought the development of two
proteins, using Protalix’s plant cell culture platform. The undisclosed proteins, aimed at
large-sized markets, are not part of Protalix' current product development pipeline
(Goliath, 2006). The Procognia collaboration began in September 2006 and brought
Teva access to Procognia’s proprietary glycoanalysis technology on an exclusive basis
(Teva, 2006).

        These alliances are just a couple of examples of happenings in recent years. Teva
has an aggressive strategy when it comes to alliances because its management knows that
the company can not survive without innovative technology from outside sources. They
also partner with universities and their research centers in order to increase their research
and development potential (SEC Info, 2008).

         Another unique advantage that Teva has over other pharmaceutical companies in
the biopharmaceutical sector is support from the Israeli government, which a ids in
research and development of biopharmaceuticals. There are two main reasons explaining
this relationship. First, Teva’s leadership has strong history and ties to the government.
Teva’s President and CEO, Shlomo Yanaihas, served in the Israel Defense Forces for 32
years where he achieved the rank of Major General, the highest rank below Chief of
Staff. During his military career, he held two of the most senior positions within the
Israeli Defense Forces: Commanding Officer of the Southern Command and Head of the
Division of Strategic Planning. He was also the head of the Israeli security delegation to
the peace talks at Camp David (Teva, 2008c). The second reason for governmental
support for Teva’s biopharmaceutical research is because of the co nnection that it has to
developing defenses against the threat of biological warfare. It is likely that, in turn for
funding and special regulatory treatment, the Israeli government is able to influence the
focus of certain research projects that Teva pursues and gains access to products that may
be useful for military use. In this way, both partners stand to benefit greatly.

        It is important for Teva to invest in this emerging industry. Their primary current
biopharmaceutical products are GCSF (granulocyte colony-stimulating factor) and
interferon alpha 2b, which are both sold in a limited number of markets. In addition, a
human growth hormone is marketed in the US through an agreement with Savient
Pharmaceuticals. Teva’s only biotechnology-derived proprietary product currently sold
in the US is known as Tevtropin; however, several others are distributed outside the US.
The bulk of Teva’s biopharmaceutical research and development operations are in Israel,
Lithuania, China and Mexico. Teva’s leadership has expressed interest in increasing their
operations in these countries (SEC Info, 2008).

       Without adequate funding and resources, Teva will not be able to keep up with its
competitors and could thus miss out on the major opportunities that are fore casted to
come from this new sector.
                                                                                  Teva     49

Development of Active Pharmaceutical Ingre dient Business

        Another core competency of Teva’s that will be critical for its future success is its
active pharmaceutical ingredients (API) business. The company has a leading global
market share in many chemicals used in generic pharmaceutical manufacturing. This
produces a substantial revenue stream, gives the company supplier power over many of
its competitors, and provides a stable, high quality, long-term, reliable, and cost-effective
source of APIs for the company’s own pharmaceutical production (SEC Info, 2008).

        Through vertical integration of their API and manufacturing divisions, Teva is
able to decrease variable costs, helping it to produce greater volumes and co unter the
powerful economies of scale of giants in the industry such as Pfizer and
GlaxoSmithKline. By having greater control over its own supply chain, Teva is able to
guarantee higher level of quality and safety to its customers. This is significant during a
time when confidence of consumers and governments in the safety of pharmaceutical
products are threatened by the rise in unregulated counterfeit drugs and fatal cases in the
press. A recent example is the recall of Baxter Healthcare’s Heparin recall after over 60
patients died from the drug (Mundy, 2008). The ability to not only control its own supply
chain, but those of its competitors is a significant strategic advantage in which Teva
should continue to invest.

        One way in which Teva could further develop this capability would be to invest in
building new API facilities in Latin and South America. Currently, the company sells to
several clients for their API products throughout this region. It also has eight
pharmaceutical manufacturing and R&D laboratories in Mexico, Argentina, and Chile
(SEC Info, 2008). These users of API products have to either import them from Teva’s
API manufacturing facilities in the US, India, or other locations around the globe or buy
them from regional competitors. As a rapidly growing market for Teva’s generic
pharmaceutical products, the company will need to increase production to meet increases
in demand. In order to reap the benefits of its expertise in API manufacturing and
vertical integration, Teva should invest in building new API facilities to support current
and future pharmaceutical manufacturing facilities in Latin and South America.

        A start would be to build one facility in northern Argentina to serve factories in
Santiago, Chile and Munro, Argentina. Setting this up in Argentina would be
advantageous given the country’s relative stability and weaker currency. Another facility
could be constructed outside of Mexico City to feed its factories throughout Mexico.
These facilities would also be able to sell API products to other manufacturers in this
region for increased revenues.

        Based on the value of API facilities in Italy, the cost of building two new facilities
in Latin and South America would be $137 million (SEC Info, 2008). This is an
extremely conservative figure considering that the Argentinean and Mexican economies
are less developed, and thus cheaper, than that of Italy. The difference helps to account
for the additional costs of setting up distribution channels, relocating staff, importing
equipment, etc.
                                                                              Teva    50

Forecasted Results
       (see Appendix I)

       Teva is in a strong position financially to be able to execute our strategy.

    Figure 5: Economic Value Added
       Revenues                          2007           2008            2009

       EVA                              9,408        10,490         11,696

       Analysts                         9,408        10,850         11,800

                                     Info from

        The number above produced by industry analysts, represents the financia l outlook
for Teva’s revenues by geographic region from 2007 to 2009. It shows that Teva is
expected to continue to experience outstanding revenue growth in the next several years
and this was supported very closely by our own EVA analysis as well.

     In addition to these expected revenues, Teva currently has $1.49 billion in cash and
cash equivalents. Rather than sit on these funds, we feel Teva should reinvest this cash
into the company’s main growth driver, R&D, to increase growth in the business. Due to
this large about of cash, it is unnecessary for Teva to leverage a new investment with
                                                                              Teva       51

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                                                                               Teva     52

Frieder, B.G. (2008, February 21). A patent 'reform' bill in the US has me worried.
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                                                                                Teva        53

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                                                                                      Teva        54

Appendix I: Analysis of Economic Value Added
(Please read numbers 200% it’s easier to see)

Future Cash Flow Forcast

INPUTS FOR VALUATION for TEVA Pharmaceuticals ($ millions)
Current Inputs
Enter the current revenues of the firm =                $                     9,408
Enter current capital invested in the firm =            $                    18,912
Enter the current depreciation =                        $                       521
Enter the current capital expenditures for the firm =   $                       542
Enter the change in Working Capital in last year =      $                       919
Enter the value of current debt outstanding =           $                     1,841
Enter the number of shares outstanding =                                     768.00

 High Growth Peri od                                                                  Inputs

 Enter the growth rate in revenues for the next 5 years =                              11.50%

 What will all operating expenses be as a % of revenues in the fifth year?             67.59%

 How much debt do you plan to use in financing investments?                                  0%

 Enter the growth rate in capital expenditures & depreciat ion                         39.00%

 Enter working capital as a percent of revenues                                        47.70%

 Enter the tax rate that you have on corporate income                                  16.87%

 What beta do you want to use to calculate cost of equity =                               0.14

 Enter the current long term bond rate =                                                3.38%

 Enter the market risk premiu m you want to use =                                       3.18%

 Enter your cost of borrowing money =                                                   7.50%

 Stable Period

 Enter the growth rate in revenues =                                                    6.00%

 Enter operating expenses as a % of revenues in stable period =                        67.59%
 Enter capital expenditures as a percent of depreciation in this
 period                                                                               200.00%

 How much debt do you plan to use in financing investments?                             0.00%

 Enter interest rate of debt in stable period =                                         0.00%

 What beta do you want to use in the stable period =                                      0.14
                                                                                                                                                                Teva            55

                                                                                ESTIMATED CASHFLOWS
                              Base           1                 2                      3               4               5               6               7               8               9              10
Growth in Revenue                          11.50%            11.50%                 11.50%          11.50%          11.50%          10.40%          9.30%           8.20%           7.10%           6.00%
Growth in Deprec'n                         39.00%            39.00%                 39.00%          39.00%          39.00%          32.40%          25.80%          19.20%          12.60%          6.00%
Revenues                  $    9,408   $     10,490      $            11,696    $     13,041    $     14,541    $     16,213    $     17,899    $     19,564    $     21,168    $     22,671    $    24,032
Operating Expenses
% of Revenues                 67.59%         67.59%                   67.59%          67.59%          67.59%          67.59%          67.59%          67.59%          67.59%          67.59%         67.59%
- $ Operating Expenses    $    6,359   $         7,090   $              7,906   $      8,815    $      9,828    $     10,959    $     12,098    $     13,223    $     14,308    $     15,324    $    16,243
EBIT                      $    3,049   $         3,400   $              3,791   $      4,227    $      4,713    $      5,255    $      5,801    $      6,341    $      6,861    $      7,348    $     7,789
Tax Rate                      16.87%         16.87%                   16.87%          16.87%          16.87%          16.87%          16.87%          16.87%          16.87%          16.87%         16.87%

EBIT (1-t)                $    2,535   $         2,826   $              3,151   $      3,514    $      3,918    $      4,368    $      4,823    $      5,271    $      5,703    $      6,108    $     6,475
+ Depreciation            $      521   $          724    $              1,007   $      1,399    $      1,945    $      2,703    $      3,579    $      4,503    $      5,367    $      6,044    $     6,406
- Capital Expenditures    $      542   $          753    $              1,047   $      1,456    $      2,023    $      2,812    $      4,812    $      6,812    $      8,812    $     10,812    $    12,812
- Change in WC            $      919   $          516    $               575    $         642   $         715   $         798   $         804   $         794   $         765   $         717   $         649
= FCFF                    $    1,595   $         2,281   $              2,535   $      2,816    $      3,124    $      3,462    $      2,785    $      2,167    $      1,493    $         622   $         (580)
Terminal Value (in '05)                                                                                                                                                                         $    28,286

                                                                          COSTS OF EQUITY AND CAPITAL
                                             1                 2                      3               4               5               6               7               8               9              10
Cost of Equity                                   3.83%                  3.83%          3.83%           3.83%           3.83%           3.83%           3.83%           3.83%           3.83%          3.83%
Proportion of Equity                        100.00%                 100.00%          100.00%         100.00%         100.00%         100.00%         100.00%         100.00%         100.00%        100.00%
After-tax Cost of Debt                           6.23%                  6.23%          6.23%           6.23%           6.23%           4.99%           3.74%           2.49%           1.25%          0.00%
Proportion of Debt                               0.00%                  0.00%          0.00%           0.00%           0.00%           0.00%           0.00%           0.00%           0.00%          0.00%
Cost of Capital                                  3.83%                  3.83%          3.83%           3.83%           3.83%           3.83%           3.83%           3.83%           3.83%          3.83%
Cumulative WACC                             103.83%                 107.80%          111.92%         116.20%         120.65%         125.26%         130.05%         135.03%         140.19%        145.56%

Present Value                          $         2,197   $              2,352   $      2,516    $      2,688    $      2,869    $      2,223    $      1,667    $      1,106    $         444   $    19,035

 Value of Firm                                                      $           37,097
  - Value of Debt                                                   $               1,841
 Value of Equity                                                    $           35,256
 Value of Equity per Share                                          $               45.91

                                           1995              1996                   1997            1998            1999            2000            2001            2002            2003            2004
Value of Firm by year                  $     37,097      $            36,235    $     35,086    $     33,612    $     31,774    $     29,528    $     27,872    $     26,771    $     26,302    $    26,685
$ Value of Debt                        $           -     $                -     $          -    $          -    $          -    $          -    $          -    $          -    $          -    $          -
                                                                                                                                                                                Teva            56

Economic Value Added
                                   Base            1                2             3             4             5            6               7               8               9               10       Terminal Year
EBIT (1-t)                     $      2,535   $        2,826   $     3,151   $     3,514   $     3,918   $     4,368   $       4,823   $       5,271   $       5,703   $       6,108   $     6,475 $       6,863
 - WACC (CI)                                  $          723   $       744   $       768   $       795   $       825   $         860   $         938   $       1,056   $       1,217   $     1,427 $       4,768
EVA                                           $        2,103   $     2,407   $     2,746   $     3,123   $     3,543   $       3,963   $       4,334   $       4,647   $       4,891   $     5,048 $       2,095
Terminal EVA                                                                                                                                                                           $   (96,353)
PV                                           $       2,025 $        2,233 $       2,453 $       2,688 $        2,937 $         3,164   $       3,332   $       3,442   $       3,489   $   (62,729)
PV of EVA                      $    (36,967)
+ Capital Invested             $     18,912
+ PV of Chg Capital in Yr 10   $     55,151 This reconciles the assumptions on stable growth, ROC and Capital Invested
= Firm Value                   $    37,097

WACC                                                3.83%           3.83%         3.83%         3.83%         3.83%         3.83%           3.83%           3.83%           3.83%            3.83%         3.83%
ROC                                                14.94%          16.20%        17.50%        18.86%        20.26%        21.46%          21.51%          20.65%          19.19%           17.35%         5.51%
Capital Invested                              $    18,912 $        19,457 $      20,073 $      20,771 $      21,565 $      22,472 $        24,509 $        27,613 $        31,823 $         37,309 $     124,639

Calculation of Capital Invested
Initial                        $     18,912   $    18,912      $   19,457    $   20,073    $   20,771    $   21,565    $   22,472      $   24,509      $   27,613      $   31,823      $    37,309
 + Net Cap Ex                                 $        29      $       41    $       56    $       78    $      109    $    1,233      $    2,310      $    3,445      $    4,769      $     6,406
 + Chg in WC                                  $       516      $      575    $      642    $      715    $      798    $      804      $      794      $      765      $      717      $       649
Ending                         $     18,912   $    19,457      $   20,073    $   20,771    $   21,565    $   22,472    $   24,509      $   27,613      $   31,823      $   37,309      $    44,364

Cumulated WACC                                    103.83%          107.80%       111.92%       116.20%       120.65%       125.26%         130.05%         135.03%         140.19%         145.56%

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