In the $75 billion global market for generic drugs Teva Pharmaceuticals (Nasdaq:TEVA) towers over the competition. The Israel-based company's 2007 revenues of $9.4 billion amounted to more than the total of top three U.S.-headquartered generic companies combined.

Teva beat first quarter expectations with a 52% increase in adjusted net earnings. The adjustment came from a one-time charge off related to its February 2008 acquisition of CoGenesys.

Meet The Competition
Rival Mylan (NYSE:MYL) has been struggling to digest its $6.7 billion acquisition of the generic business of Merck KGaA in late 2007, and rival Barr Pharmaceuticals (NYSE:BRL) saw its shares plummet 23.3% in one day on the heels of fumbled earnings guidance. (For more on the black art of sales predictions, read Great Expectations: Forecasting Sales Growth.)

The other major U.S. generics company, Watson Pharmaceutical (NYSE:WPI) has also had a decent run so far in 2008, helped by a strong first quarter. In my opinion, though, Teva is the one with the resources and the strategic positioning to thrive over the long haul, putting yet more distance between itself and its rivals.

Generic Product, Branded Strategy
Success in the generic drug market is not about expensive, leading-edge intellectual property turning into pharmaceutical blockbusters; that's the road to success in the patent-protected world of big pharma. Success for generics comes from getting lots of product through the pipeline into the world's highest growth markets as cost-efficiently as possible. This boils down to three things: volume, location and price.

Regarding volume, as of February 2008 Teva had 160 pending abbreviated new drug applications (ANDAs), the key pipeline metric for generics. That's about double its nearest competitor Sandoz, the generic division of pharmaceutical company Novartis AG (NYSE:NVS), and further still ahead of the U.S. trio of Mylan, Barr and Watson with 71, 70 and 60 ANDAs respectively. This includes first to file status for 49 pending "Paragraph IV" applications. These are challenges to patents of existing products with over $38 billion in current U.S. sales. In terms of currently marketed products, Teva also has a clear lead over the pack with 331, compared with 200 at Sandoz and 170 at Mylan.

Geographically, Teva earns a bit more than 50% of its sales in the U.S. with the remainder coming from its two non-U.S. divisions: Europe, containing the developed markets of Western Europe as well as EU accession countries such as Poland and the Czech Republic; and International, containing many of the world's fast-growing emerging markets. The company attributed much of the 31% sales growth in the International division to strong results in Russia and Latin America as well as its own home market of Israel, which accounts for 5% of the company's total pharmaceutical sales.

In the customer's eye generics are all about price, and for manufacturers, price is all about supply chain management. Supply chain management means getting it right in terms of demand forecasting and logistics planning, not just at the next point of distribution downstream or upstream, but along the entire complex distribution network.

Teva's 14 global manufacturing locations and its investment in best-in-class supply chain management processes and technologies put it in a good position to enjoy meaningful cost-based advantages. There are also economies of scale that come with being the industry's volume leader.

The Competition Speaks
Of course Teva's competitors are by no means standing idly by while the industry leader moves ahead. Pittsburgh-based Mylan's acquisition of Merck KGaA immediately expanded its global footprint to the markets where the German company had built an extensive presence, including a number of key markets in Europe as well as Asia and Australasia.

That acquisition nearly doubled Mylan's revenue base and may provide important cost benefits down the line; however the company is experiencing some hiccups along the way, particularly with Dey, its specialty producer of inhalations solutions, injections and sprays. This unit was responsible for a $385 million goodwill impairment charge in the first quarter, hurting Mylan's earnings guidance for the rest of the year. It's on the block for divesting.

Conclusions
Size matters in the generic drug market. Teva is a giant, but it's a smart giant. It has a strategy that capitalizes on cost-efficient volume growth in key world markets, including emerging hotspots like Latin America, Central and Southeastern Europe. Teva's global roots, extensive product arsenal and best-of-breed logistics position it to further tighten it's grip on this industry.

To learn how to find a healthy pharmaceutical investment in a market full of weak drugs, read Measuring The Medicine Makers.

Related Articles
  1. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  2. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  3. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  4. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  5. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  6. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  7. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  8. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  9. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  10. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center