Daniel Brown Stein MGMT 580 Mid-Term Exam

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Daniel Brownstein Dr Subramanian - Management 580 10/31/2011 Mid Term Exam Exam Questions 1. Examine the key strengths of Teva Pharmaceuticals (Hint: a good approach to this would be to identify 1-2 resources/capabilities and analyze them) Teva Pharmaceuticals has a number of resources and capabilities that have helped it to establish a stronghold on the generic pharmaceutical industry. The first capability that has helped Teva establish itself as the top player in generics is that it has someho
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  Daniel BrownsteinDr Subramanian - Management 58010/31/2011 Mid Term Exam Exam Questions 1. Examine the key strengths of Teva Pharmaceuticals (Hint: a good approach tothis would be to identify 1-2 resources/capabilities and analyze them) Teva Pharmaceuticals has a number of resources and capabilities that have helpedit to establish a stronghold on the generic pharmaceutical industry. The first capabilitythat has helped Teva establish itself as the top player in generics is that it has somehowfound a way to develop generic drugs and an incredibly low cost. Although Margins arenot quite as lucrative in the generics arena as they are for competing innovative pharmaceutical companies, Teva has found a way to earn almost 20% in net income. Thisis quite the anomaly because Generics are typically priced lower than the srcinalversions, therefore giving less revenue to make margin. Teva not only provides over 240generic drugs, they also provide services like inventory management, and they are able tooffer an unmatched output. By having such control and vertical integration in the industryit has complete control over the quality of its products. Teva has always been a costleader and that has enabled them to take a significant amount of market share in most of the world’s largest markets. Teva has continually “guaranteed” the lowest price to their customers, and has repeatedly undercut any competitor who has challenged their positionin a give market. They have shown an aggressive stance in keeping market share with a“whatever it takes” attitude, and bullying competitors who can’t offer products at thesame price due to lack of scale or overhead. By scaling up and acquiring companies allover the world one would think that this might impose a great challenge to Teva’smanagement on how to utilize and create synergies amongst these acquisitions to reduceoverhead. By initially limiting its growth to the US and Israel, and easing its way into  new markets through acquiring homegrown brands Teva has maintained a low costculture, and achieved scale advantages that can not be matched by other companies. If they do not defend this position, and continually evolve ways to sustain their competitiveadvantage and innovation by investing in technology and processes, they may see their market share decrease in the near future.The second major resource that Teva has at its disposal is the utilization of someof the best human resources in the world. They have repeatedly found ways tocollaborate with scientific institutions in Israel, such as the Weizmann Institute, HebrewUniversity of Jerusalem, or the Technion. Teva’s strong relationship with Israeliacademic institution has yielded 150-180 proposals for new drugs per year and it hasrelied on these institutions to use their overhead for drug discovery. In addition, for decades Israel has been the destination for many of the world’s best scientists andengineers who have been made to flea their homelands. From its inception Teva has builta reputation for successful merges and fair treatment of employees. It has continually feltthat the consequences of treating employees poorly could devastate them and it is deeplyreflected the values of Eli Hurvitz. By establishing a tone at the top and an optimisticwork ethic as referenced by Hurvitz’s “Billion Dollar Theory”. Hurvitz has alwayslooked for efficiencies and synergies within the business and has refrained fromoutsourcing all of Teva’s manufacturing because labor is not the only input. Employeesin Israel are much more productive and capital intensive. For the most intensive processes they have outsourced productions to India. As Teva has continually acquiredmany corporations it has also continually reconfigured its supply chain after every major   acquisition so that it can fully take advantage and streamline its business processes tomaximize efficiencies. 2. How sustainable is Teva’s leadership position in generics? What are possiblethreats to its competitive advantage? As Teva has grown and invested in sizeable acquisitions such as Ivax, and Sicor ithas been able to pay a discount for quality companies. By driving deals and being savvywith capital it has enabled Teva to improve its market share and positioning with everyacquisition. I do believe that Teva’s leadership position in generics is sustainable due totheir low overhead, and namely their ability to keep selling, general, and administrativecosts near 15% of net sales (15-20% below most competitors their size). If they are ableto sustain their cost structure and low overhead they should also retain their growth.Daniel Vasella, the CEO of Novartis, has predicted that the international generics marketwill double from $52B in 2005 to $100B in 2010, leaving plenty of room for Teva toenhance their presence internationally.Teva has also been extremely successful in forming alliances to exploitexclusivity through the “Paragraph IV” provision. The “Paragraph IV” provision is anexclusivity period that sets up a highly coveted duopoly for the first six months after theintroduction of a generic drug. Over the past decade Teva has filed and won the mostexcluvities in the industry earning a reputation for quick accurate filings and aggressive patent litigation. IF Teva is going to sustain its position as the market leader sustainingand defending this position by investing and training employees how to be the best atfiling and patent litigation is integral. From 2004 to 2006 Teva had filed 24 paragraph IVchallenges compared to just 8 of its biggest competitor Sandoz. Teva also has to continueto build a deep pipeline in the US as well as other developed countries. In order to  defend their global market share Teva should focus on generics in large potential marketsthat are gradually opening up, such as Germany, France, Japan, South-east Asia, andLatin America. While pharmaceutical prices have eroded over time this is only going to benefit Teva as there are few competitors who can compete on their level of scale andcost effectiveness.Teva has threats coming from all angles and many competitors. Unfortunately for Teva other large pharmaceutical companies who have traditionally dealt with innovativedrugs have seen the profitability and stability in the generic drugs industry and havestarted investing and acquiring generic manufacturers to compete with Teva. These firmshave used aggressive tactics and since they also posses similar scale to Teva they pose acredible threat to growth opportunities. Pharmaceutical research is an inherently high-risk activity for these innovative companies, although it produces very high margins.This coupled with rising drug development costs and the average cost of $800M to bringa drug to market has made innovative firms seek stability that can be achieved from thegenerics industry. Another tactic to cut into generics manufacturers margins is the efforts by innovative firms to release their own authorized generic versions of their productsduring the six-month exclusivity period and collecting a licensing fee for productionrights from competing generics companies.Also, starting in the 90s the generics industry has experienced entrance of newtypes of competitors. Low cost competitors such as Ranbaxy, from India, and EasternEuropean companies have emerged virtually duplicating Teva’s methodologies andtrying to compete on cost of generics. With fierce domestic competition and lowconsumer ability to pay Ranbaxy was forced to have a low cost and overhead structure.
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